Common Myths About Loans and Low CIBIL Scores

When it comes to loans and credit, particularly in India, a lot of misconceptions and myths circulate, especially around CIBIL scores and how they affect your ability to secure a loan.

CIBIL (Credit Information Bureau India Limited) is one of India’s primary credit bureaus, and it assigns credit scores based on an individual’s credit history.

Many people believe that a low CIBIL score makes getting a loan nearly impossible, while others think that having no credit score is somehow better than a bad one. These misconceptions can lead to unnecessary anxiety and financial missteps.

Myth 1: You Cannot Get a Loan with a Low CIBIL Score

Truth:

It’s a widely believed myth that having a low CIBIL score means you won’t be able to secure a loan. While a low CIBIL score (typically below 600) can make it harder to get approved for loans, it doesn’t mean you’re completely shut out of the lending world.

Many non-banking financial companies (NBFCs), online lenders, and fintech platforms are willing to offer loans to individuals with low CIBIL scores.

These lenders often evaluate other factors such as your income, employment stability, and debt-to-income ratio before making a decision.

However, borrowers with low credit scores may face higher interest rates and stricter repayment terms. The key is to search for lenders who specialize in loans for individuals with poor credit and to compare interest rates to avoid paying excessively.

Myth 2: No Credit History is Better than a Bad Credit History

Truth:

Many people believe that having no credit history is somehow better than having a poor credit score, but this is not the case. Having no credit history can be just as challenging, if not more so, than having bad credit.

Without any credit history, lenders have no way to assess your financial habits, such as whether you make timely payments or how responsibly you manage debt.

For lenders, a person with no credit history poses a similar risk to someone with a low credit score. A low CIBIL score indicates poor past behavior, but no score at all means there’s no way to evaluate potential risk.

To build a positive credit history, you can start with small credit products like secured credit cards or short-term loans and ensure you make payments on time.

Myth 3: Checking Your Credit Score Frequently Lowers It

Truth:

This is one of the most pervasive myths when it comes to credit scores. People often avoid checking their credit score out of fear that it will negatively affect the score.

In reality, checking your own credit score through a “soft inquiry” does not impact your credit score at all.

A “hard inquiry” is when a lender checks your credit report as part of a loan or credit application, and too many hard inquiries in a short period can temporarily lower your score.

However, regularly checking your own score through soft inquiries is a good financial habit that can help you monitor your credit health and spot errors early.

Myth 4: A Low CIBIL Score is Permanent

Truth:

Many borrowers believe that once you have a low CIBIL score, it’s a permanent mark on your credit profile. This isn’t true. Your credit score is dynamic, meaning it changes over time based on your financial behavior.

If you consistently make timely payments, reduce your debt, and avoid taking on too much credit, your CIBIL score will gradually improve.

The key to raising your score is patience and responsible financial management.

Pay off outstanding debts, keep your credit utilization ratio low (ideally below 30% of your credit limit), and avoid applying for too many new loans or credit cards within a short period.

Myth 5: Paying Off All Debt Immediately Will Instantly Improve Your CIBIL Score

Truth:

While paying off debt is an essential step in improving your credit score, it won’t result in an immediate boost. Credit scores are calculated based on a variety of factors, including your payment history, credit utilization, length of credit history, and types of credit used.

Paying off debt is a great way to improve your creditworthiness, but it takes time for your score to reflect these changes.

Depending on how credit bureaus report updates and how consistently you maintain good financial behavior, it may take several months to see a noticeable improvement in your CIBIL score.

Additionally, closing old accounts after paying them off can negatively affect your credit history length, which is also a key factor in your score.

Myth 6: A High Income Guarantees Loan Approval

Truth:

Income alone is not a deciding factor when it comes to loan approval.

While having a stable and high income may improve your chances, it’s your credit score, debt-to-income ratio, and repayment history that matter the most to lenders.

Even if you earn a substantial income, a low CIBIL score due to missed payments or excessive debt can make lenders hesitant to approve your loan.

Your financial habits and how responsibly you’ve managed credit in the past play a significant role in determining whether you’ll qualify for a loan and at what interest rate.

Myth 7: You Should Avoid Using Credit to Keep a Good CIBIL Score

Truth:

Another common myth is that avoiding credit entirely is the best way to maintain a good credit score.

On the contrary, responsible use of credit is essential to building and maintaining a healthy CIBIL score. Lenders need to see how well you manage credit over time to evaluate your creditworthiness.

A good way to build and maintain credit is by using credit cards responsibly, making timely payments, and keeping balances low.

If you avoid credit altogether, you may struggle to build a robust credit history, which can hurt your chances of getting approved for larger loans like home loans or car loans in the future.

Myth 8: Only High CIBIL Scores Get Low Interest Rates

Truth:

While it’s true that borrowers with high CIBIL scores tend to qualify for lower interest rates, it’s not the only factor lenders consider when determining rates. Lenders may also look at other aspects of your financial profile, such as your income, employment stability, and debt-to-income ratio.

Additionally, shopping around and comparing loan offers from multiple lenders can help you secure a better deal, even if your credit score isn’t perfect.

Don’t automatically assume you’ll be stuck with high interest rates due to a low credit score—negotiating with lenders and finding the right one for your financial situation can lead to more favorable loan terms.

Conclusion

There are many myths about loans and low CIBIL scores, and believing them can prevent you from making informed financial decisions.

Understanding how credit scores work, how they impact your ability to get a loan, and what steps you can take to improve your creditworthiness are critical in securing the best financial options for your situation.