Financial misinformation is expensive. In India, deeply held myths about personal loans, credit scores, and borrowing behaviour cause thousands of people to make poor financial decisions every single year – paying more interest than necessary, avoiding credit entirely, or missing opportunities to build a strong financial profile. Here is the truth behind five of the most persistent personal loan myths that Indian borrowers still believe today.
The Main Myth: A Personal Loan Hurts Your Credit Score
This is the single most widespread financial myth in India, and it is entirely false. A personal loan does not inherently damage your credit score. In fact, when managed responsibly – with consistent on-time repayments – a personal loan can actively improve your credit history over time by demonstrating reliable repayment behaviour to lenders.
What actually hurts your score is missing EMI payments, defaulting on debt, or making multiple loan applications simultaneously. The loan itself is neutral. Your behaviour around it is what determines the impact.
Myth 1 – Checking Your Credit Score Lowers It
The Reality: Checking your own CIBIL or Experian score is classified as a soft inquiry and has absolutely zero impact on your credit score. You can check your score daily on authorised platforms without losing a single point.
Your score only dips slightly on a hard inquiry, when a bank or lender pulls your credit report as part of a formal loan application assessment. Understanding this distinction is critical because avoiding your own credit report out of fear is one of the most common reasons Indians remain unaware of errors or fraudulent activity on their profiles.
| Inquiry Type | Who Initiates It | Credit Score Impact |
| Soft Inquiry | You checking your own score | Zero impact |
| Hard Inquiry | Lender reviewing your application | Minor temporary dip |
Myth 2 – A Low Credit Score Means Automatic Rejection
The Reality: If you have a credit score lower than 700, you do not automatically have to overlook taking out a personal loan. Other than the number, lenders look at other factors such as income stability, employment history, existing monthly obligations, debt consolidation history, etc.
What lenders actually assess:
- Monthly income and income stability
- Fixed obligation to income ratio
- Employment type and tenure
- Existing loan and credit card obligations
- Credit history length and repayment consistency
A strong income stability track record can compensate for a lower score in many lending assessments, particularly with NBFCs and digital lenders who use alternative data models.
Myth 3 – Closing Old Unused Credit Cards Boosts Your Score
The Reality: This myth causes genuine and lasting damage to credit profiles across India. Closing old credit cards actually hurts your score in two specific ways.
First, it shortens your average credit history length – one of the key factors in your overall credit assessment. Second, it immediately increases your credit utilisation ratio by reducing your total available credit limit while your outstanding balances remain unchanged.
Example:
- Total credit limit across all cards: ₹3,00,000
- Outstanding balance: ₹60,000
- Current utilisation: 20% (healthy)
- After closing one card with a ₹1,00,000 limit, utilisation jumps to 30% (less healthy)
Keep old credit cards open and occasionally use them for small purchases to maintain a healthy credit history and low utilisation ratio.
Myth 4 – Only Salaried Employees Can Get A Personal Loan
The Reality: Personal loans are not only for those who are on a salary. Those who are freelancers, self-employed, business owners or have an income that fluctuates can all qualify if they’re able to prove they have enough income to pay back with other documentation.
Alternative income proofs lenders accept:
- Two to three years of Income Tax Returns
- Six to twelve months of bank statements showing consistent deposits
- GST returns and audited profit and loss statements
- Active client contracts or invoices demonstrating ongoing revenue
Income stability demonstrated through consistent documentation often matters more than the source of that income in modern lending assessments.
Myth 5 – Never Borrowing Gives You A Perfect Credit Score
The Reality: This is perhaps the most counterintuitive myth of all. Having no prior credit history does not give you a perfect score – it gives you no score at all. Being new to credit means lenders have no data on which to base a risk assessment, making them far more likely to reject your initial applications.
The solution is building credit deliberately:
- Start with a secured credit card against a fixed deposit
- Take a small personal loan and repay it consistently
- Avoid prematurely foreclosing loans, as this removes positive repayment history
- Keep credit card utilisation below 30% consistently
| Credit Behaviour | Score Impact |
| No credit history | No score – difficult to borrow |
| Consistent EMI repayment | Positive long-term score building |
| Loan foreclosure | Removes positive history prematurely |
| Debt consolidation | Can improve score if managed well |
| Multiple simultaneous applications | Temporary score dip |
The Bottom Line
Financial myths cost real money. Understanding that a personal loan managed responsibly builds rather than damages your credit history, that income stability matters as much as credit score, and that never borrowing leaves you financially invisible are all essential realisations for any Indian borrower navigating the modern lending landscape. Check your credit profile regularly, borrow deliberately, and repay consistently – that is the only formula that genuinely works.
FAQs
Q1- Will a personal loan ruin my credit score?
No, a personal loan will not automatically ruin your credit score. In fact, when managed responsibly, it can even help build a stronger credit profile.
Q2-What is the biggest killer of credit scores?
The absolute biggest killer of credit scores is a missed payment reported 30 days or more past the due date.
Q3- How do personal loan myths affect my borrowing decisions?
Personal loan myths cause fear and confusion, leading to poor financial choices. Borrowers may avoid beneficial credit options or accept unfavorable terms due to a lack of proper research.
Disclaimer: The information provided on this website is for general informational purposes only and should not be considered financial or legal advice. Please consult with a qualified financial advisor before making any decisions.
