Taking out a car loan might be necessary for your new ride, but it won't immediately help you get a mortgage. In the short-run, a car loan is going to hurt your credit score. But, over time, it could help you build a stronger credit score, increasing your chances of getting a mortgage at a low interest rate.
When you take out a car loan, you're adding to the amount of money you owe on your various lines of credit. This lowers your credit score because lenders are more concerned you won't be able to make all your loan payments. Thirty percent of your credit score comes from your amounts owed, but since your car loan is an installment loan rather than a revolving loan, it won't have as big an impact as if you were racking up a similar amount of debt on your credit card. And, as you pay down the car loan, your credit score will improve because you're showing you can handle installment loans.
Applying for car loans can also ding your score a bit for the short term because of the auto loan lenders pulling your credit report. Each time your credit report gets pulled in response to an application for new credit, an inquiry goes on your report and affects your score for one year. According to the Fair Isaac Corporation, which created the FICO credit scoring algorithm, you can minimize this downside by clumping all your car loan applications within a week or two so that all the inquiries count as just one for credit scoring purposes.
Your payment history is the largest individual factor in figuring your credit score, counting for 35 percent of your score. As a result, how you handle your car loan payments can either be a boon for your chances of getting a home loan or can cause your chances to go belly up. If you make all your payments on time, your credit score is going to rise. But, miss a few payments and you're going to have a harder time getting a mortgage.
It's only 10 percent of your credit score, but using a variety of credit helps boost your score as well. When you add a car loan to your mix of other credit, like credit cards and student loans, you're showing you can handle different types of loans. As a result, your credit score goes up and so do your chances of getting approved for a mortgage.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."