If you’re shopping for a home loan or delving into real estate, you may have heard of credit scores. But what are they? Simply put, they are a rating system for an individual that tells lenders how good a person’s financial position is.

A credit score considers various aspects of a person’s life such as age, income, length of employment, savings, credit card debt, outstanding loans and payment history including late payments or any infringements.

A high score means a good financial standing while a low score means the opposite. This is very important because big banks and small lenders will use your credit score to assess whether they should give you a home loan. It also helps them determine the maximum amount they should lend to you.

Therefore, it is important to improve your credit score before trying to get a home loan. So, how do you find out your credit score?

There are a few credit bureaus that do this, and one of the leading ones is called Veda. Some bureaus allow you to check your score online or they will post your credit report within days or weeks. There may be fees and charges to check your score.

Once you have discovered your score, here are 10 simple ways to improve your score before you apply for a home loan.

1. Pay your bills on time

It may seem trivial but paying your bills on time does help your credit score. It’s simple really. If you are prompt with your payments, you are more likely to pay your mortgage repayment on time too. Bigger banks may be hesitant to lend to you if you have a history of missing payments and accumulating debts.

2. Pay off loans quickly

Whether it is a car loan, personal loan or study loan, try to pay them off quickly by making sacrifices elsewhere. This will help pull up your credit score immensely as the smaller your debt is, the bigger your home loan can be. You may have to scrimp or bootstrap for a while, but it will be worth it for your dream home or property investment plans.

3. Consolidate debts for a better deal

If you’re stretched for extra repayments, especially when you have several debts, consider consolidating them with one bank or one new debt to get a better deal and rate. For example, you can take a personal loan at a lower rate to pay off all your credit card debts instantly. Then, you’re only paying off one personal loan monthly at a much lower rate than the typical 18% - 20% rate on your credit card debts.

4. Utilise a zero-interest rate card

Balance transfer is one of the most common ways to reduce your credit card debts faster. The concept here is to transfer all your credit card debts into one card that does not charge any interest for a specific period to save on interest payments.

There are lots of banks offering this deal so shop wisely. You must be disciplined to pay off all the debt within the interest-free period, which is usually within 12 months. Do not be tempted to add to the debt. Otherwise, you’re only going around in circles or be worse off than where you started.

5. Lower your credit card limit

Besides paying off your credit card debt quickly, try lowering your credit card limit. Calculate the amount you realistically need every month and lower your limit closer to the figure.

For those who hardly ever reach their credit card limit, this may sound insignificant. But lenders will add up all your credit card limits to calculate how big of a liability you can be to them in case you max out on all your cards for whatever reason.

It may sound farfetched to you, but your situation may change any time such as being made redundant or a tragedy may strike that incurs expensive hospital charges and medications.

6. Cancel unused credit cards

You may like having different credit cards for reward programs and discounts, but every credit card you open decreases your financial score. Do yourself a favour and cancel all cards which you don’t use regularly or need. Realistically, you just need 1 or 2 cards for convenience and perks.

7. Reduce rental expenses

Nowadays, it is not uncommon to find children moving back with their parents to save money for a home deposit. If you’re renting, you can also find a housemate to share the rent and groceries. Or move to a smaller room in the house so you pay less rent. The less expenses you have, the more viable you are as a home loan candidate.

8. Shop for better rates for your bills

This requires diligence and regular reviews. You can save a lot when you switch providers or plans when it comes to your insurance, electricity, water, gas, internet and mobile phone. It doesn’t require hard work, just a little effort to scout for deals. Figure out what’s important to you and what you can cut down or do without and search for the right package for you. This may save hundreds of dollars monthly.

9. Start a side hustle

Apart from waiting for bonuses or a promotion, think of other ways you can make money. A higher income will help improve your credit score. You can start a side hustle such as a small business, freelance on the side or take a part time job such as becoming an Uber driver. When it comes to a small business, it’s best to start small to test the market and minimise your risk.

10. Find a passive income source

Passive income doesn’t mean you don’t have to lift a finger. It means putting in a lot of hard work upfront so you can reap the fruits of your labour later. There are plenty of ideas to try based on the skills and passion you have. You can copyright and sell your photos, start an online course or useful guides, delve into legitimate multi-level marketing, rent out an extra room or buy high dividend stocks.

If you have more disposable income and assets with a small or zero debt, then lenders are more willing to give you a bigger loan for your property.