These settings work for me:
Save as DDS
DXT5 with interpolated alpha
Where to put it is the big question. You can either save it over an existing skin which is less work and lets you use it online without mismatches.
Or
Create a Folder in "GSC2012/GameData/Vehicles/Vehicle type
Name the Folder the Team Name
Save the DDS in there.
Then you need to make a .VEH file. (use notepad)
Its important that the Skin name and the .VEH file name are the same. I usually just copy an exisiting veh file and edit it, then save it as my own skin name.
DefaultLivery="SkinName.DDS"
Extra0="Cockpit"
Extra1="Cockpit"
Extra2="Windshield"
Extra4="Cockpit"
Extra5="Cockpit"
Extra6="Cockpit"
Extra7="Cockpit"
HDVehicle=StockV8.hdv
Graphics=StockV8_2012_Pug.gen
Spinner=StockV8_2012_Spinner.gen
GenString=PUGFAABL
Cameras=StockV8_cams.cam
Sounds=StockV8.sfx
HeadPhysics=StockV8_Headphysics.ini
Cockpit=StockV8_cockpitinfo.ini
Number=Number
Team="TeamName"
PitGroup="Group16"
Driver="DriverName"
Description="StockCar V8: DriverName and Number"
Engine="V8"
Manufacturer="StockCarV8"
Classes="StockV8"
FullTeamName="TeamName"
Category="Stock Car V8, Peugeot"
Hope this helps