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Does Universal Credit Affect Credit Score?

21/04/2022

Creditfix > Blog > Creditfix Debt Help Blog > Does Universal Credit Affect Credit Score?

 

It’s sometimes easy to feel like life revolves around your credit report. Virtually everyone wants to check it – from mobile phone providers and insurers to mortgage and personal loan companies.

So, what happens to this credit report and your credit score when you recieve Universal Credit?

We’ll cover a quick answer at the beginning of this guide – then we’ll explore the topic in more detail, covering everything you need to know about claiming Universal Credit and the different things that can change your credit rating.

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Does claiming Universal Credit affect your credit score?

The short answer is no – that fact that you claim universal credit does not have a direct impact on your credit score.

So, if you’re working on improving your credit score – or just interested to know what your credit rating is – it won’t go up or down based on current or future universal credit payments.

The trouble is, your credit rating isn’t the only thing that lenders take into consideration when they decide whether or not to give you credit.

Therefore, if you’re wondering whether Universal Credit or other benefit payments will affect your chance of being offered credit, the answer depends on a few other factors.

We’ll look into those other factors here – and explain a little more about how Universal Credit and credit scores work.

What is Universal Credit?

Universal Credit is a benefit that’s designed to offer some financial support if you have a low income or you’re out of work.

It was introduced in 2012 as part of The Welfare Reform Act. It replaced six previous benefits:

  • Child Tax Credit
  • Housing Benefit
  • Income Support
  • Income-based Jobseeker’s Allowance
  • Income-related Employment and Support Allowance
  • Working Tax Credit

There’s no set amount of Universal Credit. Instead, it’s ‘means tested’ – which means the Department for Work and Pensions (DWP) look at your unique circumstances then decide how much Universal Credit you qualify for.

As well as being means-tested, you also have to meet the following criteria to qualify for Universal Credit:

  • You must be 18 years old or over
  • You have to live in the UK
  • You must be under State Pension age

There are currently around 6 million people who receive some amount of Universal Credit in the UK.

What is your credit score?

Now we’ve looked at Universal Credit in some detail, it’s useful to understand a little more about your credit score and the things that affect it.

First, let’s start with all the different names you’ll hear when people or companies talking about credit scores.

As well as ‘credit score’, you’ll also see ‘credit history’, ‘credit file’, and ‘credit rating’. These phrases are often used interchangeably – but they actually mean slightly different things:

Credit file, credit report & credit history

This is a record of everything that could have an impact on whether a company offers you credit.

Your credit history, credit report or credit file has information about your borrowing history – what you borrowed, how you paid it back, how much you’ve got outstanding, any missed payments – and lots more.

There are three different credit referencing agencies that each hold a credit file about you – Experian, Equifax, and TransUnion.

Credit score

Each of the credit referencing agencies we’ve mentioned above create a ‘score’ for you based on the different things that appear in your credit report.

Each of these scores are slightly different – so don’t get too hung up on comparing them to each other. TransUnion scores you between 0-710, Experian between 0-999, and Equifax between 0-1,000.

Credit rating

Since credit scores are all different, most credit referencing agencies and lenders have different ‘ratings’ – ranging from very poor to excellent.

So, to sum it all up – the better your credit file looks, the higher score you’ll get, and the higher credit rating bracket you’ll fit into.

Do benefits show up on my credit report?

If you’re worried about benefits payments showing up on your credit history – don’t be.

Your credit file focuses on money you’ve borrowed – not your income.

Therefore, it doesn’t matter whether you’ve just got your first universal credit payment after being made unemployed – or whether you have a large monthly salary, neither of these things are factors in getting a good credit rating.

What else do lenders consider when you apply for credit?

Things get a little bit more complicated around getting credit when you’re on Universal Credit when you look at how companies decide who they’ll lend to.

Banks and other financial institutions have very strict lending policies. When you apply for credit, they’ll look at a range of different factors (including your credit report) before they approve or deny your application.

For instance, if you applied for a loan or credit card, the company you’re applying will almost certainly ask your:

  • address and address history
  • age
  • employment status
  • income
  • number of dependant children
  • plans for the money you’re borrowing

If you apply for a mortgage, this list of questions will get much larger – with most lenders even wanting to see bank statements so they can analyse your spending habits.

A lot of the time, these questions are designed to help a lender calculate the affordability of the loan or credit you’re asking for. In the finance industry, this is called ‘creditworthiness’.

Why does affordability matter?

The governing body that oversees all lending in the UK is the Financial Conduct Authority (FCA). The FCA have a section of their lender’s handbook that goes into lots of detail about why affordability matters.

Ultimately, they want you, the customer, to be able to be able to repay what you’ve borrowed with no problems – and for the company to get their money and interest.

This is where getting a monthly Universal Credit payment could put a hurdle in your way.

Remember, Universal Credit is designed for people who are on a low income or out of work. So, both these factors could potentially prevent you from paying back what you owe – especially when we are living through such large cost-of-living increases.

Try not to worry too much though – affordability checks aren’t designed to stop you borrowing or getting credit for no good reason. Instead, they’re largely there to protect you.

When you’re doing some quick maths in your head to decide whether you can afford what you’re signing up for, it’s easy to underestimate your monthly outgoings – but this can lead to financial difficulty further down the line.

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Will a Universal Credit claim stop me from getting a mortgage?

As we’ve already mentioned, mortgage affordability checks are some of the most in-depth around.

Lenders will look at every part of your financial life to make sure that lending you money to buy a house is safe for them and for you.

Receiving Universal Credit will make it less likely that you’ll be accepted for a mortgage – but it’s not the actual Universal Credit that’s stopping you.

Instead, it’s likely to be your financial circumstances and affordability that’s will stand in your way.

If you want to be confident you’re applying with a lender that’s likely to say yes, it’s a good idea to check their eligibility criteria before you apply.

This will give you a solid indication of whether your circumstances are matched to their policies.

If I receive Universal Credit can I still get a loan or credit card?

Like a mortgage application, getting Universal Credit or other benefits won’t stop you from getting accepted for a credit card or a loan – but it could be an indication to a potential lender that you might struggle with affordability.

To give yourself the best possible chance of being accepted, make sure you have a good credit history before you apply – and check that you can comfortably afford the repayments.

What kind of things affect your credit score?

If you’re confident that you can afford the repayments you’re considering, it’s useful to thinking about the other things lenders will look at on your credit file.

These are some other factors that lenders will use to decide whether or not to provide you with credit:

  • Number of applications: if you’ve applied for lots of loans or credit cards, it can be a warning to lenders that other companies have already declined your applications
  • How much credit you’ve used already: Lenders can see how much you’ve borrowed and how much the maximum amount you can afford to repay
  • Missed or late payments: If you’re missing payments or have late payments (arrears) lenders will question whether you can afford to pay more
  • Borrowing more than you can currently afford: If your current level of borrowing is more than you can afford to repay, lenders will worry that you’ll have to use additional credit (like payday loans) to make your monthly repayments
  • Serious debt problems: Your credit file will show if you have County Court Judgments (CCJs) against your name – these could be an indication that you’re struggling financially

How can I boost my credit score?

Since we now know the claiming Universal Credit isn’t necessarily going to stop you being considered by a lender, it’s a good idea to make sure all the other things they look at are in good shape.

The following actions can boost your credit score and make you more appealing to lenders:

  • Make sure you’re registered on the electoral role: Having the correct address on your credit file makes a big difference to your credit score
  • Pay all your bills and repayments on time: Proving that you’re a reliable borrower will increase confidence that you’ll make your repayments
  • Reduce how much you owe overall: Decreasing the overall amount you’ve borrowed will increase your disposable income, making it more likely that you’re pay this new lender back

Why are you borrowing?

Finally, you might want to think about why you’re considering borrowing money.

There are lots of good reasons to borrow money or get credit – but there are some not-so-good reasons too.

Even before the impact of Covid-19, it’s estimated that over 8 million people in the UK do not have enough money to get from pay check to pay check – and this often leads people to borrow more to pay off on-going debts.

While it’s tempting to look at borrowing money to make it through to your next payday or universal credit payment, it’s a tactic that almost always leads to more money worries – after all, this next lender will expect repayments to start next month.

If this is the case for you – as it is for millions of other people – you might instead want to consider a more lasting debt solution to help get your financial life back on track.

Where can I get more advice on Does Universal Credit Affect Credit Score? and other debt solutions?

To discuss your options and get the support you need to deal with your debt today, contact us now on 0800 0431 431 or click the button to get started

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