Does Universal Credit Affect My Credit Score?

If your financial situation recently changed and you applied for Universal Credit,  you might be wondering, “Does Universal Credit affect credit score?” Don’t worry because this is an important question to ask. The COVID pandemic has affected so many people — all of us, in fact. We faced challenges in our jobs, businesses, income, and our lives, in general. That’s why it’s no surprise that many people have recently applied for UK government support, such as Universal Credit. 

What is Universal Credit?

Universal Credit is a benefit system in the UK. Before the pandemic, about two million individuals were being assisted by the government through this system. However, by 2020, during the outbreak of the pandemic, the number shot up to record-breaking figures. A lot of families and individuals who used to be financially stable and secure were thrown off balance and found themselves facing so much uncertainty. 

To address this problem, the government encouraged people who need financial support to apply for Universal Credit. If you’re one of the many individuals who have no experience when it comes to the UK benefits system, you’ve probably gone through an ordeal to learn the processes involved in applying for financial support. Along with this, it’s valid to ask, “Does Universal Credit affect your credit score?” You’ve worked hard to have a good credit history, and it’s understandable to want to know if receiving government support will have any bearing on that. 

How Universal Credit Began

Before 2013, anyone who needed financial support from the government had to apply for it. However, it’s not as simple as that. It’s an almost never-ending process of filling out application after application. To make things a lot simpler and easier for both the people and the government, Universal Credit was introduced. With this benefits system, a person only had to make one application. The benefits will be given just once a month as well. It can be a combination of the following, which used to be given separately:

• Child Tax Credit
• Housing Benefit
• Income-based Employment and Support Allowance
• Income-based Job Seekers Allowance
• Income Support. 

Any person who is a UK resident may apply for Universal Credit. However, in order to qualify they have to meet a set of criteria which includes conditions like being over  18 years old or over, out of work, or having a low income. The Department for Work and Pensions evaluates each application and checks the financial situation of every applicant. This process determines how much financial support is needed by the individual. 

Will Universal Credit Appear on Credit Report?

Benefits of any kind, including Universal Credit, are part of your income. Your sources of income are not detailed on your credit report, so if you’re receiving financial support through Universal Credit, then this will not show in any record on the credit report or history. Credit reports actually focus on debts and loans, not your income. The information available on credit reports are details of your credit arrangements, both past and current. This includes credit card transactions, loans, mortgages, car finance agreements, and overdrafts. 

However, when you apply for a finance product like car finance, lenders typically require proof of income so that they can assess if you have the means to pay off the loan. In order to comply with the loan requirements, you’d be disclosing that you’re receiving government support in the process. Therefore, lenders will know it, even if it’s not on your credit report. 

Does Universal Credit Affect Credit Score?

Receiving support through Universal Credit won’t necessarily affect your credit score. However, when you do apply for financial products, the lender or financial institution will evaluate not just your credit score but a number of other factors, such as your sources of income, outgoings, and other debts, to name a few. But don’t be disheartened if you’re in this situation, especially if you’ve had a good credit history before receiving government support. 

Each lender will have their own way of assessing loan applications, so it’s a bit difficult to say for certain whether you'll be successful in getting a credit agreement, if you ever apply for one. And every lender must do an affordability check before they agree to lend you money. But you’ll have a better chance of being approved on your loan application if you’ve maintained a good credit history and score by paying back anything that you owe from financial institutions in the past. In this respect, then receiving benefits through Universal Credit wouldn’t really be a big hindrance in getting your loan application approved. 

Factors that Negatively Affect Credit Scores

Now that we’ve cleared things up about Universal Credit and its bearing on your credit score, what are the factors that affect your credit score and ability to get credit from financial institutions? 

Multiple Credit Applications

If you apply for loans or credit repeatedly or send applications to several lenders and banks in a short span of time, this can impact your score. Every application requires a hard check on your credit report, and hard checks get recorded on the report whilst also knocking off a few points on your credit score. When lenders see that you’ve been applying for credit from a number of financial institutions, you’re going to look desperate, and that’s typically a red flag for lenders. 

Late or Missed Payments

Missing a payment, even just once, can affect your credit score. If you have a habit of forgetting your due dates or mishandling your budget and not being able to pay your debts, then that won’t look good to banks and lenders. Late and missed payments can get worse and become defaults, which might lead to County Court Judgments (CCJs). A CCJ means the lender has taken legal steps to address your non-payment. Do note that a CCJ can stay on your credit report for up to six years.  

Takeaway

So, does Universal Credit actually affect your credit score? The short answer is no, it won’t. But your credit score is not the only factor that lenders assess in determining if they’ll approve your loan application. If you’ve taken good care of your credit history and have a proven record that you’re responsible in paying your debts, then receiving benefits through Universal Credit shouldn’t be an issue in getting credit, either currently or in the future, provided your score doesn't suffer if you go through a period of not paying your debts on time.