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Is The Universal Credit A Future Debt Solution Or Debt Problem?

8th October 2013

Trials of the Universal Credit are underway in four areas around Manchester. Aston under Lyne, Wigan, Warrington and Oldham are leading the way in this process. Over the next few months the scheme will be expanded to include Hammersmith, Harrogate, Shotton, Bath and Rugby. Several benefits are combined into a single payment under the Universal Credit which is paid monthly rather than fortnightly.

Some fear that the transition will be difficult for benefits recipients that have become used to budgeting around a fortnightly payment cycle. The Payments Council has looked into this concern by running a survey of current claimants of benefits. Their research has resulted in an estimate that almost three million Universal Credit claimants will struggle to manage their finances once the scheme has been introduced around the whole of the UK.

Many claimants, especially those that have been out of work for some time, may be very unfamiliar with running a monthly budget and retaining sufficient funds to get through to the end of the month. If things go wrong there will be an obvious temptation to resort to expensive payday loans or other short-term credit to make ends meet until the next Universal Credit payment is received. This creates a very significant risk that trouble with debts will follow as the interest payments due increase quickly.

The Government prefers to point out the opportunities that monthly payment will create for individuals and families to make savings. For example, people might be able to switch from expensive card payment systems for gas and electricity to cheaper monthly direct debit deals. A larger single payment might also reduce the number of supermarket visits that are needed during the month and enable people to take advantage of discounts for buying larger quantities.

So will the Universal Credit monthly payment protect people from getting into debt or make it more likely that they’ll fall into a growing cycle of expensive short-term credit? No doubt there will be people who struggle to manage a monthly budget, though the Government will make exceptions (and pay fortnightly) in some circumstances and offer help to other people during the transition to try to avoid problems in the future. Whether this will be enough to prevent some people from getting into debt as a result of the transition appears to be very questionable. 

It should not be forgotten that many Universal Credit claimants will already be fantastic household budget managers as a result of having to be careful about what they spend. Undoubtedly many will use their new monthly payment and budgeting skills to find even better deals that make their budget stretch even further in the future.

We hope that sufficient support will be put in place for those that fall victim to avaricious short-term credit providers that latch onto budgeting problems created by the introduction of the Universal Credit. Otherwise the winners may well be outnumbered by the losers from this changeover. 

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