A north London council is opening credit union accounts for all new tenants as part of a move to minimise the impact of welfare reform.

Catherine West, Labour leader of Islington Council, speaking before a Department of Work and Pensions select committee this morning, said: ‘Every time we sign up a new tenant in council housing we give them a credit union account even though they may not know what it is at the time.

‘By putting £2 in it opens up an account and helps deal with loan sharks prevalent on the high street. This is maybe something that can be suggested to all housing associations.’

The select committee was taking evidence as part of an inquiry into universal credit, which will be phased in from October 2013. Under the new system, a number of benefits will be merged into one single payment paid direct to tenants, instead of to social landlords. This, along with an average 10 per cent cut in council tax benefit, has led to fears that tenants may struggle to pay their rents.

Ms West said: ‘I think people are going to get into serious amounts of debt. Asking people who have never paid tax before to start paying council tax, I just think people are not going to be able to pay it. It think we are going to get into a poll tax situation which will be really uncomfortable.’

Ms West also suggested post offices could have a role in helping claimants access the internet. Universal Credit will be administered by a large IT system and the government envisages the majority of claims will be made online.

Gavin Smart, director of policy and practice at the Chartered Institute of Housing, said early results from the DWP’s demonstration projects to test direct payment are ‘encouraging’, but warned housing providers are having to put in a ‘huge amount of additional effort’ and cost to make it work.

Mr Smart said: ‘It is quite clear that landlords are ramping up their financial inclusion advices and support they give to tenants. That is a cost they are absorbing that they won’t get back.’

Merrick Cockerill, chairman of the Local Government Association, warned that the move to direct payment creates a risk of ‘bad debt’ for landlords which could affect their borrowing. He said: ‘Bad debt is not something we are used to.’

Incommunities housing association, in Bradford, is offering to open credit union accounts for tenants by providing them with a £10 deposit. Walsall Housing Group is also offering to cover administration fees for tenants wanting to open credit union accounts.