Most lenders are reluctant to divulge how they assess loan or finance applicants. Nonetheless, many now resort to computer programs, which determine if an individual is an acceptable risk.

Staff simply load in the data provided by a loan applicant and the system instantly determines whether or not the loan will be granted.

Evan though the loan can be assessed instantly, lenders always seek independent verification of the credit worthiness of applicants.

Credit ratings have always been a source of confusion with little understanding of how agencies providing these services operate.

Baycorp Advantage is the main provider of credit history data and is by far the biggest player in the field. The system operates by subscription, with subscribers both accessing data and providing information to the Baycorp database.

Subscribers include most banks, finance companies and those interested in providing long-term credit facilities.

When a credit applicant applies for a loan, a privacy consent agreement is signed which allows the potential credit provider to interrogate the Baycorp database.

It is important to realise that the agreement you sign is a one-off authority. The Australian system stores a range of personal information such as your name, address, date of birth and driver's licence number.

Next, the system keeps track of all the loans you currently have and loans or credit facilities which have a payment which is more that 60 days late.

Similarly, their service keeps track of any summonses issued against you, judgments by a court of if you have been bankrupt in the past seven years. Subscribers are required to notify the service once you have paid a late payment or resolved a problem but not the fact that you may have paid the loan out early or never missed a payment.

The belief that a credit agency provided a "good" credit reference is incorrect. It simply provides an inventory of your personal information and credit history.