Does Universal Credit Affect Credit Score?
In the UK, millions of people rely on Universal Credit to manage daily expenses and cover essential costs. With finances already stretched, many claimants wonder if being on Universal Credit could harm their credit score.
Since credit scores play a critical role in getting loans, mortgages, and even rental agreements, this is a valid concern.
So, does Universal Credit affect your credit score? The answer is not as straightforward as a simple “yes” or “no.” While Universal Credit itself does not directly impact your credit score, certain financial choices made while on Universal Credit could.
In this blog, we’ll explore the connection between Universal Credit and credit scores, discuss indirect effects, and provide useful tips on protecting your credit score while on benefits.
What Is a Credit Score?
A credit score is a three-digit number that represents your creditworthiness. Lenders, banks, landlords, and even utility companies use this score to assess how likely you are to repay money you borrow or pay bills on time.
Credit scores are calculated by credit reference agencies such as Experian, Equifax, and TransUnion. These companies gather financial information from banks, lenders, and other financial institutions to track your borrowing history.
Why Is a Credit Score Important?
A good credit score can help you:
- Get better interest rates on loans and credit cards
- Increase your chances of being approved for a mortgage
- Secure rental agreements with private landlords
- Qualify for higher credit limits
On the other hand, a low credit score can limit your financial options and result in higher interest rates.
How Is a Credit Score Calculated?
Your credit score is determined by several factors, each of which reflects your financial behavior. These factors are weighted differently, but all of them play a role in how credit agencies calculate your overall score.
Here’s a breakdown of the key factors:
Payment History (35%)
- The most significant factor in your credit score is your payment history.
- Late payments, missed payments, and defaults can negatively impact your score.
Credit Utilization (30%)
- This refers to how much of your available credit you are using.
- If you have a credit card limit of £1,000 and use £900, your credit utilization rate is 90%, which can reduce your score.
- It is recommended to keep your credit utilization below 30%.
Length of Credit History (15%)
- The longer you have had credit accounts open, the better it is for your score.
- Closing old accounts can reduce your score, especially if those accounts had a strong payment history.
Types of Credit Used (10%)
- A good mix of different types of credit (like mortgages, credit cards, and loans) shows lenders that you can manage multiple forms of debt.
Recent Credit Inquiries (10%)
- When you apply for a loan, mortgage, or credit card, lenders run a hard inquiry on your credit report.
- Too many hard inquiries in a short period can reduce your score, as it may signal financial distress.
Does Universal Credit Affect Your Credit Score?
The short answer is No, Universal Credit does not directly affect your credit score. Unlike loans, credit cards, or other credit products, Universal Credit is classified as a government welfare benefit, not a form of credit.
The Department for Work and Pensions (DWP) does not report Universal Credit payments or claims to credit reference agencies like Experian, Equifax, or TransUnion.
Why Doesn’t Universal Credit Affect Your Credit Score?
- Not a Loan: Universal Credit is a welfare payment, not a credit product.
- Not Reported to Credit Bureaus: The DWP does not share your claim status with credit reference agencies.
- No Impact on Credit Utilization: Since Universal Credit is not a line of credit, it does not factor into your credit utilization rate.
Can Universal Credit Indirectly Affect Your Credit Score?
While Universal Credit does not directly impact your credit score, it can still have an indirect effect. This happens when the financial challenges that claimants face while on Universal Credit lead to actions that can hurt their credit score. Here’s how it can happen:
Missed or Late Payments on Utility Bills, Rent, and Loans
If you depend on Universal Credit as your primary source of income, you might face difficulties in paying rent, utility bills, or credit card payments on time. Here’s why that matters:
- Utility Bills and Mobile Phone Contracts: Utility providers and mobile phone companies report missed payments to credit reference agencies. If you miss a bill payment or pay late, it can reduce your credit score.
- Rent Payments: While most rent payments are not reported to credit bureaus, some rental agencies and landlords may use “Rental Exchange” schemes. If you miss rent payments, it could appear on your credit report.
- Loan and Credit Card Payments: Missing payments on any type of loan or credit card will be reported to credit agencies, and this can significantly damage your score.
Use of Payday Loans or High-Cost Credit
If Universal Credit payments are not enough to meet living expenses, some people turn to payday loans or other high-interest credit options. This can indirectly affect their credit score in several ways:
- Short Repayment Windows: Payday loans have short repayment deadlines, and missing payments can trigger negative marks on your credit report.
- High-Interest Debt: Since payday loans come with high-interest rates, borrowers often struggle to repay them on time, leading to missed payments that damage credit scores.
- Visible to Lenders: Lenders can see if you’ve taken out payday loans, which may be seen as a sign of financial instability, even if you repay them on time.
Use of Overdrafts and Credit Cards
If Universal Credit payments are delayed, some claimants use credit cards or overdrafts to cover essential bills. While credit cards can be helpful in emergencies, carrying large balances affects your credit utilization ratio (the percentage of credit used compared to the available limit), which can lower your credit score.
How to Avoid Indirect Impacts on Your Credit Score?
- Set Up Payment Reminders: Use apps or bank notifications to remind you of bill due dates.
- Budget Your Income: Plan your expenses to prioritize essential payments like rent, utility bills, and loan repayments.
- Avoid Payday Loans: Seek financial support from charities or debt advice organizations like StepChange instead of using payday loans.
Does Universal Credit Appear on a Credit Report?
No, Universal Credit does not appear on your credit report. Your credit report only shows financial information related to loans, credit cards, and credit accounts. Universal Credit is a government welfare benefit, and it is not considered a form of credit or a financial product.
How Do Credit Reference Agencies Handle It?
Credit reference agencies such as Experian, Equifax, and TransUnion do not track welfare benefits like Universal Credit. When you view your credit report, you will only see credit accounts like:
- Loans (personal loans, payday loans, student loans)
- Mortgages
- Credit cards
- Mobile phone contracts
- Utility bill payment history (if reported)
Why Doesn’t Universal Credit Appear on a Credit Report?
- The Department for Work and Pensions (DWP) does not share information about benefit claims with credit agencies.
- Benefits are not classified as “credit products,” and they are not linked to borrowing or repayment behavior.
What If You See Universal Credit on Your Credit Report?
If you spot references to Universal Credit on your credit report, it could be a mistake or a case of identity theft. If this happens:
- Contact the Credit Agency (Experian, Equifax, or TransUnion) and ask them to investigate.
- Check for Identity Theft: If you notice unfamiliar loans, they may have been taken out fraudulently using your personal information.
What Happens If You Take an Advance Payment on Universal Credit?
When you apply for Universal Credit, it may take several weeks to receive your first payment. To support claimants during this waiting period, the UK government offers Advance Payments.
This is an interest-free payment that helps claimants cover essential expenses while waiting for their first Universal Credit payment.
Do Advance Payments Affect Your Credit Score?
No, advance payments do not affect your credit score. Here’s why:
- Advance payments are not loans from a lender; they are advances of your own Universal Credit entitlement.
- The repayment process is internal. Instead of requiring you to make payments to a lender, the DWP deducts the advance from your future Universal Credit payments.
- Since the DWP does not report these deductions to credit agencies, it has no impact on your credit report.
How Are Advance Payments Repaid?
- Advance payments are automatically deducted from your monthly Universal Credit payments over a fixed repayment period.
- If you struggle to repay, you can request smaller deductions or ask for help from debt charities like StepChange.
How Universal Credit Affects Loan and Mortgage Applications?
While Universal Credit does not affect your credit score, it can influence your ability to get a loan or mortgage. Here’s how:
1. Lender Affordability Assessments
When you apply for a loan or mortgage, lenders check your ability to afford repayments. Since Universal Credit is considered a form of government support (not earned income), some lenders may be reluctant to offer loans.
2. Mortgage Applications While on Universal Credit
- Affordability Checks: Lenders assess whether your income (including Universal Credit) is sufficient to afford the mortgage.
- Type of Lender: Some lenders offer “specialist mortgages” for people on benefits. These mortgages are designed for low-income or benefit-dependent applicants.
3. Loan Applications While on Universal Credit
- Lenders may view benefit payments as “unstable income” when compared to salaried jobs.
- Some lenders offer personal loans to people on benefits, but you may face higher interest rates.
How to Improve Your Chances of Getting a Loan or Mortgage?
- Maintain a High Credit Score: Pay bills on time and reduce your debt.
- Build a Strong Credit History: Use a credit card for small purchases and pay off the balance every month.
- Find Lenders that Accept Benefit Income: Some mortgage lenders and credit unions cater to applicants on Universal Credit.
How to Protect Your Credit Score While Claiming Universal Credit?
Protecting your credit score while on Universal Credit requires discipline and smart financial management. Here’s how you can do it:
- Pay Bills on Time: Late payments on rent, loans, credit cards, and utility bills are reported to credit agencies and lower your credit score. Set up direct debits or standing orders to avoid missing payments.
- Reduce Credit Utilization: Keep your credit card balances low. Ideally, you should only use 30% or less of your available credit limit.
- Avoid Payday Loans and High-Cost Credit: Avoid short-term loans with high interest rates, as these can be difficult to repay and damage your credit score.
- Use Budgeting Tools: Use budgeting apps like Money Dashboard or Yolt to track spending. This can help you avoid taking on unnecessary debt.
- Check Your Credit Report: Use free services like Experian, Equifax, or TransUnion to regularly check your credit report. If you spot errors, contact the credit agency and request a correction.
How to Check If Universal Credit Affects Your Credit Report?
If you’re curious about how Universal Credit may be affecting your credit report, you can check it using any of the three major UK credit reference agencies:
How to Get Your Credit Report?
- Experian: Offers free credit reports through its app and website.
- Equifax: Check your credit report for free via ClearScore.
- TransUnion: Access your report for free using Credit Karma.
What to Look For on Your Credit Report?
- Check for Loan or Debt Entries: If Universal Credit appears as a loan or credit product, it may be an error.
- Check for Errors or Inaccuracies: If you spot loans you didn’t take out, it could be a sign of identity theft.
How to Dispute Errors on Your Credit Report?
- Contact the Credit Agency (Experian, Equifax, or TransUnion).
- File a Dispute: Provide evidence that the entry is incorrect.
- Follow Up: Ensure the error is resolved.
Conclusion
Universal Credit does not directly affect your credit score, as it is a government welfare payment, not a loan or credit product.
It does not appear on your credit report, and the Department for Work and Pensions (DWP) does not share your Universal Credit claim details with credit reference agencies.
However, financial decisions made while on Universal Credit can indirectly affect your credit score. Missed payments on bills, reliance on payday loans, and high credit utilization can all reduce your credit score.
By following good financial habits like paying bills on time, avoiding payday loans, and regularly checking your credit report, you can protect your credit score while receiving Universal Credit.
If you’re ever in doubt, you can check your credit report for free using services like Experian, Equifax, or TransUnion. Stay proactive, seek financial advice if needed, and remember that Universal Credit itself does not harm your credit score.
FAQ
Does a Universal Credit advance payment affect my credit score?
No, an advance payment is not reported to credit reference agencies, so it does not affect your credit score.
Does DWP report Universal Credit claims to credit agencies?
No, the Department for Work and Pensions (DWP) does not share Universal Credit claims with credit reference agencies.
Can being on Universal Credit affect my ability to get a loan or mortgage?
Yes, indirectly. Lenders may assess your affordability, but Universal Credit itself does not affect your credit score.
How can I check if Universal Credit affects my credit report?
Check your credit report for free using Experian, Equifax, or TransUnion. Universal Credit will not appear on your report.
Can taking payday loans while on Universal Credit affect my credit score?
Yes, if you miss repayments or default, it can negatively affect your credit score.
