Editorial Policy

Got a card beef? You may have to settle for arbitration

Allie Johnson

August 31, 2015

When you get a shiny new credit card, you may be thinking about the buying power, perks and rewards – not whether you'll ever want to slap your credit card company with a lawsuit. 

But you should know that buried deep in the fine print, many card companies stick a requirement that a cardholder use individual arbitration, rather than a lawsuit, to solve any dispute with the issuer.

In fact, over half – 53 percent – of credit cards come with an arbitration agreement, according to a 2015 Consumer Financial Protection Bureau study and report to Congress on arbitration.

Just one example: Discover's arbitration agreement states that either the card issuer or the consumer can decide to use arbitration, instead of court, to resolve a dispute. Big banks are more likely than smaller banks and credit unions to insist on arbitration, according to the CFPB.

“Forced arbitration is a big issue in financial services,” says Christine Hines, consumer and civil justice counsel for consumer advocacy group Public Citizen. “And it's extremely prevalent in credit cards.”

What is an arbitration agreement?  

Arbitration is a method for resolving disagreements that keeps the parties out of the courtroom, according to the American Arbitration Association, a nonprofit organization that offers arbitration and other dispute resolution services.

“Arbitration is less complicated than going to court,” says Nessa Feddis, a senior vice president for the American Bankers Association. Arbitration can be done online, on the phone or in an office, she says.

So how does the arbitration process work? Here's how the AAA handles arbitration cases, according to an FAQ for consumers provided by the group:

  1. A case gets opened. Either a consumer or a company can file a claim. The AAA then assigns a case administrator to send letters to both sides. The party who didn't file the claim can send in a written response. You don't need a lawyer, but you can hire one to represent you if you want to, according to the AAA.
  1. An arbitrator is assigned. The arbitrator is a neutral, impartial person who reviews the case, according to the AAA. The arbitrator files appointment paperwork and disclosures, and the parties get a chance to weigh in on whether that arbitrator should stay on the case.
  1. A preliminary hearing is held. In a preliminary hearing, which can happen on the phone or in person, a roadmap for the case is created. The parties can discuss a date for another hearing and deadlines for submitting information.
  1. The arbitrator decides the case. The two sides have the opportunity to settle the case at any time. If that doesn't happen, once the arbitrator has all of the information from both sides, he will make a decision within 30 days.

“It's a very consumer-friendly process,” Feddis says.

The problem with credit card arbitration

A mandatory arbitration agreement can cause several problems for consumers, according to the CFPB and Public Citizen. For example:

  • Many consumers won't bother with arbitration. When consumers have issues with a card company, there usually isn't a hefty sum at stake, Hines says. For example, say a card company signs a consumer up for a program without her consent and starts tacking a small monthly fee onto the bill. The consumer might lose less than $100. “The losses are so small that a consumer isn't going to do an individual arbitration on their own,” Hines says. And over 90 percent of arbitration agreements prohibit class – or group – arbitration, according to the CFPB.
  • Arbitration is secret. Unlike class-action lawsuits, which often make headlines, arbitration proceedings stay between the parties involved, Hines says.
  • The decision is legally binding. An arbitrator's decision is legally binding, according to the AAA. However, a consumer can appeal an arbitrator's decision, but may have to pay fees to do so, according to the CFPB. In one case, the CFPB reviewed, a panel of three arbitrators took 15 months to review a case, and upheld the original decision in favor of the credit card company, according to the CFPB study. Several other appeals were dropped when the consumers failed to pay fees.

However, arbitration has some provisions that benefit consumers, such as the ability to award “treble damages,” essentially tripling the consumer's award, Feddis says.

Also, the CFPB found that consumers who prevailed in arbitration got an average of almost $5,400, she points out. In contrast, most consumers don't get much, if anything, in a class-action lawsuit, Feddis says. “You might get something like $3 and a coupon,” she says.

However, the CFPB found, in its study, that class-action lawsuits can help more consumers – about 32 million a year are eligible for class-action settlements – and have the power to get companies to changes practices that harm consumers.

Credit card arbitration: What can you do?

When shopping for a card, most consumers don't consider the dispute resolution rules, according to the CFPB study. When the CFPB asked 929 consumers to list factors they considered when comparison shopping for their current card, many mentioned rewards and interest rate, but none listed the dispute resolution process as a factor in their choice.

But you should find out whether there's a mandatory arbitration clause or not, and exactly what it says, before opening a new card account. Here are a few other things to keep in mind:

  • Several large card issuers, including Bank of America and Capital One, agreed in 2009 and 2010 to stop using mandatory arbitration clauses for the next several years. That agreement has expired, but several large issuers have not gone back to the clauses, Hines says.
  • If your issuer uses a mandatory arbitration clause, there might be a provision that allows you to opt out, according to the CFPB. In the study, about one-quarter of arbitration clauses offered an out, usually by mailing in a signed document. The consumer typically must opt out within a certain time period after opening the card, usually between 30 and 60 days.
  • If you have a dispute with your card issuer, and there's a mandatory arbitration clause, it might be a good idea to consult with a consumer attorney, Hines says.

In any case, learn about mandatory arbitration and what it means for you now, so you don't get hit with a surprise in the future, Hines says.

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