Does universal credit affect credit score?

Roman Danaev

28 January 2023

As food and energy prices in the UK soar, more and more families are struggling financially and relying on government support. One of the programs for people dealing with financial difficulty is Universal Credit.

Although, this poses a few questions: Can Universal Credit impact your credit history? Will it stand in the way of getting car finance? What else can affect your credit score? Today, we’ll answer these burning questions, along with other ones related to the issue.

What is universal credit?

Universal Credit is a benefits system set up by the UK government for individuals and families with no or low income. The program was introduced as part of The Welfare Reform Act and replaced six other types of benefits:

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

It is available to anyone of working age that lives in the UK and meets the criteria. Aside from the age limit, the minimum income requirements are under £16,000 in money, savings, and investments. Bear in mind that the amount of support allowance is not fixed. This means that how much Universal Credit you can get depends on how much you have.

Universal Credit is obviously a great thing for thousands of families across the country, but we should still analyze its direct and indirect impact.

So, does universal credit affect my credit rating?

No, it doesn’t affect your credit score. That is because they are fundamentally different things. Universal Credit replaces or supplements a person’s income, while credit reports focus on their debts and ability to repay.

Will moving to Universal Credit affect you? Yes, but not in the way that a loan would. One important thing you should take away from this article is that the program doesn’t lend money, it gives money.

Claiming Universal Credit is not the same as credit agreements, like mortgages, credit cards, and personal loans, because you’re not supposed to repay these grants. Hence, they don’t have anything in common with things that directly affect your credit. It’s just extra money from the government for those who are eligible.

Will universal credit appear on credit report?

No, and it’s for the same reason. Credit history is all about the money you’ve borrowed and paid back. By reading the report, they’ll only know about your past and current debts. Of course, your borrowing history doesn’t represent your full financial situation, which is why it’s not the only document required from you during the application process.

If you’re planning to that you’re claiming benefits, we’ve got bad news. Lenders will still know because they ask for proof of income, which Universal Credit is a part of. But they don’t usually care where the money is coming from as long as it’s stable income from a legitimate source.

Is universal credit bad for you?

In most cases, no. Universal Credit benefits serve an important purpose of topping up wages and even giving work coach support to help people find and stay in work. While doing so, the program doesn’t damage your creditworthiness in any way. As we’ve mentioned, financial support and debts are not connected.

The only time Universal Credit will appear on your car loan application is in the neutral context of income information. There is nothing inherently bad about it.

What Kind of Things Affect Your Credit Score?

So far, we’ve only talked about Universal Credit not hurting credit scores. Why don’t we talk about what actually affects them?

Here is what can affect your credit score in a negative way:

  • Missing or late payments. Payment defaults stay on your record (and after the rating) for up to six years.
  • Too many applications. It makes the applicant seem desperate for money and indicates that they can’t handle their money well.
  • Getting close to or exceeding credit limits. This tells lenders that you’re borrowing more than you can afford (or getting dangerously close to it).
  • Opening and closing credit accounts often. Leaving your credit card accounts open seems more dependable than cancelling them all the time.
  • Little or no credit history. A thin file is less likely to get you approved. There is sometimes too little information for any credit score to be produced.

Can you get car finance on universal credit?

Yes, you can get approved for car finance even if you claim Universal Credit. There are plenty of good lenders that understand that everybody’s circumstances are different and some people’s income includes benefits. In a way, you are treated as a higher-risk customer with low credit scores. You’re not a perfect candidate with pressures on your finances, but shopping around for multiple quotes will prove that you have options.

What really stands in your way is not receiving a means-tested benefit but rather how much your earn. Low incomes are the primary reason why loan applicants get rejected. If you can’t secure enough funds through more traditional sources, like a 9-5 job, you’re not a particularly desirable borrower. You’ll probably still get approved, but the terms could be better.

How can you improve your eligibility?

Let’s finish on a bright note! Here are a few tips to increase your appeal among potential lenders:

  • Keep your credit score as high as you can
  • Handle your existing debts reliably
  • Save up for a substantial down payment
  • Avoid hard credit checks
  • Consider singing a guarantor
  • Register on the electoral roll
  • Get pre-approved for car finance

Contact a reliable car finance company

Will Universal Credit affect your credit score? The short answer is no. But as you’ve just read, it’s more complicated than a simple yes or no answer.

Receiving Universal Credit isn’t the issue because it doesn’t indicate that you’re irresponsible in paying your debts. What may be the issue is low income. That is one of the factors that lenders use to gauge your reliability as a lender. So, don’t refuse Universal Credit just because you’re worried about your loan eligibility- receiving benefits adds to your income and puts you in better financial circumstances than without them.

Now that you know what actually builds a good credit history, you need to take the right next steps. If you do it right, you’ll get an affordable car finance deal. Reach out to us at Carplus to learn about these steps and get behind the wheel in minimal time.

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