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Tuesday, July 16, 2024   

Credit Card Binding Arbitration: When Ignorance Isn't Bliss
by Rebecca Lindsey
Rebecca Lindsey is a staff writer for Credit Ratings.com. CardRatings.com offers a consumer report of US credit cards and instant online approvals. Named among the 'Web's Best Sites' by SmartComputing magazine! The site is courtesy of Citizens for Fair Credit Card Terms, Inc.
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Rebecca Lindsey

Few people want to go to court, but there are times when it is necessary to preserve your rights and to fight unfair or illegal treatment. Watch out for mandatory arbitration clauses in your credit card agreements, which can prevent you from having your day in court.

Over the years, the phrase “read the fine print” has become more important than ever. It’s a battle cry—and sage advice—used by consumer advocates that is well worth heeding, particularly when it comes to credit cards.

As you read through your credit card terms and conditions, beyond the usual definitions of rates, late fees, annual charges, etc., you’ll find some interesting things and probably learn some new phrases: such as universal default clause and binding or mandatory arbitration. 

Binding arbitration sounds intimidating, and it can be. By including a binding arbitration clause, the credit card issuer is giving notice that if the cardholder has a dispute with the company (including identity theft, fines, penalty or late fee disputes, interest rate guarantees, etc.) he or she can’t sue the card issuer in court. Instead, they must take the case to a private arbitrator or judge.

Scott Bilker, founder of DebtSmart.com, notes “If binding arbitration applies to your credit card terms, and it probably does, then you have waived your right to a jury trial. If there is a dispute you must use arbitrators to resolve the issue.”   

And one other thing: the arbitrator is chosen and hired by the credit card issuer.  

The arbitration process 

The process of an arbitration hearing can be daunting, particularly to a consumer facing a giant in the credit card industry. Credit card issuers hire arbitrators through independent companies, such as the National Arbitration Forum and the American Arbitration Association, who actively market their services to the issuers. Consumers often enter an arbitration hearing alone from their side since hiring representation is not cost-effective.

According to Paul Bland, an attorney with Trial Lawyers for Public Justice, once an arbitrator has made their decision in a hearing it is next to impossible to do anything about it through appeal or dispute. Plus, if a consumer brings a case and the consumer loses, the consumer can be made to pay the arbitrator’s fee.

How has it gotten this far? 

Mandatory arbitration clauses are everywhere these days. According to givemebackmyrights.com, which operates in part from a grant from AARP, mandatory arbitration clauses can also be found in health insurance contracts, telephone contracts, car contracts, rental clauses, bank loans, house repairs, etc., etc. Most consumers are in at least one binding arbitration contract and don’t even know it. 

How have consumers lost their right to have their day in court? By entering into agreements without clearly understanding the terms of those agreements. Bland relays, “Few consumers read and understand all of the terms and conditions of the credit cards that they use. Therefore, not enough consumers are in the know about binding arbitration to produce a public outcry.” 

Most agree that arbitration is a useful procedure for resolving legal conflict and helping with clogged up court dockets--when the opposing sides are on equal footing and both agree to the arbitration. Not so much when it’s a multi-million dollar company against a lone consumer who may or may not have realized that the binding arbitration clause even existed. 

What can consumers do? 

Bland gives some guidelines for consumers regarding mandatory arbitration: 

  • Educate yourself. First and foremost, reread (or read for the first time) your credit card terms to find out if you are currently in a binding arbitration agreement. If so, consider switching to a card that does not have such a clause.

  • Don’t ignore changes in terms. If you receive a change in terms in the mail, don’t treat it as junk mail and ignore them. Read them or call the issuer and ask that the change in terms be verbalized. If you haven’t already, create a file for your credit cards for the original terms and any changes in terms that you receive. This is a small effort that will go a long way to keeping yourself educated and up-to-date. If the change in terms is disagreeable don’t accept them, meaning: don’t use your credit card anymore. Start shopping for one that has more satisfactory conditions- the "Card Reports" section of CardRatings.com is a great place to comparison shop for a credit card

  • Don’t settle for mandatory arbitration. “The best defense against all [disagreeable] bank actions is to pick another bank,” adds Bilker. “We must use our power as consumers to reward good companies and punish the bad ones because the law may not be on our side when we need it.” 

Unfortunately, credit cards without mandatory arbitration clauses are getting harder to come by. According to Bland, some organizations such as AARP have enough muscle with credit card issuers to insist that the mandatory arbitration clause not be applied to cards issued with their name. (The same issuers typically include the clause in other cards they distribute.) Additionally, credit unions and smaller banks are usually more consumer friendly than the big card issuers and do not include such clauses. 

If and when you decide to switch over to another card to avoid binding arbitration, Bland suggests letting the company know exactly why you’re doing so. While you may think that one complaint won’t accomplish much, if enough consumers stop carrying a card for a particular reason the point will soon be made. 

It is getting harder to find credit cards that have acceptable terms, but they’re out there. They may be more obscure cards, and they may not have nearly the perks that your current card carries. But if you’re not a perk junkie, then you may want to consider them. In the long run, aren’t your rights more important than reward points?



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