... when I used the credit score simulator, Credit Sesame, Credit Karma, Wallet Hub and others told me that using their algorithm is stated my score will drop 10 to 20 points.
Simulators are notoriously innacurate. Most of them do not actually look at anything in your profile, they just make very generalized predictions like "a new accout will lower your score" which is typically true.
@Anonymous wrote:I was under the impression that having a diverse, high number of tradelines will enhance your credit. ...
Generally speaking, yes it will. Some account types are negatives, no matter how healthy and well maintained they are though (consumer finance accounts, CFAs, are a prime example) -- and some creditors will be very skittish with large numbers of accounts and the exposure that creates.
To the point that you presumably came here for, if you do not have any active installment type accounts, and the loan you received for the car was actually listed as an auto loan, it will in time have a significant positive effect on your account. A few different effects will occur simultaneously:
- An inquiry indicating you are seeking credit will arive after applying for a loan -- a small negative that will last a year (-2-5pt)
- A new account will be listed on your report if you take a loan -- slightly larger but still small negative that lasts a couple years with diminishing effect over time as the Age of Youngest Account increases (-5-20pt)
- An open tradeline with very high utilization will be added to your account -- a modest negative that will diminish as the % of the original balance is paid down (-5-20pt)
- Your credit mix now includes an installment loan of a beneficial type, auto -- a modest positive that remains as long as the loan is open (+20-30pt)
Ideally for FICO scoring purposes, you might take a loan with a minimal downpayment and then immediately pay it down to a very low percentage of the original loan amount (reducing the effect of #2 and #3 above), and stretch the remaining small percentage out over a long loan term (maximizing the benefit of #4 for as long as possible). That doesn't make a lot of sense for practical financial purposes though -- other installment loans are better for this -- but it is a convenient side effect of a typical auto loan that after a year or two it should have a generally significant positive effect on your FICO scores.
If you're looking for a quick boost in scores, taking out an auto loan probably isn't the best option. The inquiry and new account with high utilization will probably lower your score a little in the near term -- from the middle to the end of a normal loan's life is when you see the positives.
Taking out an SSL and artificially manupulating the payment life cycle to reap the benefits of an installment loan while negating most of the negatives is a far more effective way of boosting scores through the credit mix portion of the formula -- but it is important to note that under most scoring models, the largest open loan has the greatest effect. So if you were planning to purchase a vehicle on credit, it would wipe out most of the effect of an SSL after the auto loan was added to your credit report -- though it could potentially qualify you for better auto loan terms while it was in effect. (if you had a $4k SSL running and boosting your score 30pt, and took out a $30k auto loan, most models largely ignore the $4k loan and your score would drop and follow the credit mix effects created by the originally $30k auto loan)
I'd usually suggest aiming for a single SSL with a long loan term. You don't want to dilute your average age of accounts with lots of short term items and inquiries.
In your case they don't really do much for you anymore, as only the largest installment account will really matter for most things, and that is probably the auto loan. Give it a year to build payment history and you'll have what you need to get other favorable credit products.