Credit HistoryFinancial Dictionary -> Debt -> Credit History
This history is collected over the years by a web of financial institutions and credit reporting agencies and sold to lenders if they request a credit report on a potential client. They then assess the risk and use this to determine what loans they can offer this client and at what interest rates.
Somebody with a long history of bad debt and defaults is unlikely to be given a loan, whereas somebody with a history of paid loans will be deemed reliable. Sometimes having no rating is worse that have a bad one, because there is no history to judge your risk by.
In the United States and Canada an agency that collects this credit history is known as a Credit Bureau, and in the United Kingdom these are called Credit Reference Agencies.
It may seem strange that all of this information is available, but all parties involved with your finances are usually part of the web. Banks and financial institutions will make this data available to agencies, and the agencies will make this collected data available back to the banks and institutions. Courts and debt collectors will also provide information on any bankruptcies or bad debts.
Everybody is entitled to their own credit rating, and can obtain this information for a small admin fee. It is sometimes the case that false information ends up on the report and thus double checking it for errors can be the difference between getting a mortgage and being rejected.