When you apply for credit, the lender typically reviews your credit history from one of the credit bureaus. This process might sound mysterious if you're unsure what the credit bureaus are and what purpose they serve, but the concept is quite simple.
A credit bureau is simply an agency that gathers information about your credit usage and history, then presents it to a lender when you apply for credit. Each credit bureau differs in how they extract and compile your information, so it's important to understand how they work.
There are three main credit bureaus: Experian, Equifax and TransUnion. Below, CNBC Select reviews common questions about the credit bureaus so you can be more informed when applying for a new card.
A credit bureau is a credit reporting agency that aggregates information about your credit history into a credit report. This typically includes payment history, number of credit accounts and length of credit history.
Information in your credit report is shared with financial institutions and other parties, such as real estate and auto companies, when you apply for credit cards, mortgages and auto loans. Credit bureaus do not make lending decisions; they only collect and provide information to lenders. Lenders use this information to determine your eligibility for credit.
If you've ever checked your credit score from various sites, you may notice that it is rarely the same — but that's normal. Your credit score can differ for a few reasons.
First, each credit bureau has different information on your credit report, depending on how frequently they update your information and how far back they extend their inquiry into your credit habits. In addition, there are hundreds of different credit scoring models, such as FICO Score 8 or VantageScore 3.0. Each credit scoring model calculates risk differently, which results in score variations depending on which model the credit bureau uses to calculate your score.
For example, when you check your free credit score with Experian, they provide your credit score based on the widely-used FICO Score 8 model. However, free Equifax scores use their own proprietary model, the Equifax Credit Score.
Last, not all lenders rely on the same bureau. If you were to apply for the Chase Sapphire Preferred®, the credit report pulled could potentially be different than if you were to apply for the Citi® Double Cash Card. That's because Chase may not use the same bureau and model as Citi does to determine your creditworthiness. And if you and a friend both applied for the same card, the credit bureau used to check your credit can also differ.
Before you apply for credit, we recommend checking your credit score from all three bureaus to see where you stand holistically. And if possible, ask the lender which credit bureau they deal with so you can be sure to check to see which score you're being evaluated on.
Under the Fair Credit Reporting Act, you're entitled to one free credit report every year from each of the main credit bureaus — Experian, Equifax and TransUnion. You can access these reports for free at annualcreditreport.com, which is authorized by federal law.
Other resources, such as Experian, may provide an updated credit report every month. Note that your Experian credit report is free, but you'll have to upgrade to a paid plan to access your free TransUnion and Equifax reports.
If you notice incorrect information on your credit report, it's in your best interest to dispute it right away. One in four Americans have an error on their credit report, according to a 2012 study by the Federal Trade Commission.
Credit report errors can lower your credit score and negatively impact credit approval. The sooner you take action, the quicker the issue can be resolved.
If you notice an error on your Experian credit report, check if it's also present on your TransUnion and Equifax reports. Then dispute the error directly with the credit bureau(s). Legally, the credit bureau has to report the issue to the other two bureaus. Regardless, you should dispute it directly with each credit bureau to cover all the bases.
Read more details on how to dispute a credit report error.