Credit Infocenter

Is Credit Card Arbitration Fair For Consumers?

Written by: Kristy Welsh

Last Updated: July 13, 2017

Mandatory arbitration clauses, which essentially strip consumers of their right to go to court, are becoming commonplace, with most consumers completely unaware of their existence or implications. The information is buried in the fine print or worse, simply tacked on to credit card agreements, which most customers don't even bother to read. If you did 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 at least one new phrase: binding or mandatory arbitration.

What is Binding 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, the consumer must take the case to an arbitrator or judge.

In arbitration, a dispute is handled by a "neutral" third party, that hears both sides and makes a decision. Just about any type of dispute, whether it's between a worker and an employer, a retailer and a customer, or an insurance company and a policyholder, can be arbitrated. Attorneys agree that arbitration has its advantages. For one, it's faster. The American Bar Association estimates it takes two years for the average court case to be resolved, compared with 8.6 months for arbitration. Expediency can save thousands in legal costs.

Critics of Arbitration

Consumers may not realize they've agreed to arbitration and aren't in a position to negotiate contracts. And even if they shopped around for another credit card, all the lenders use the same mandatory arbitration language in their contracts.

There is also no proof that mandatory arbitration offers a fair outcome. Consumer advocates laugh out loud at the notion that it might be fair, since it's the credit card companies that select the arbitration companies. In California, the only state where arbitration outcomes have to be disclosed in detail, the results aren't encouraging, at least in the debt collection field. A Public Citizen study found that the National Arbitration Forum, a company that handled collection disputes, had ruled in favor of creditors 94 percent of the time. Does that seem like a fair outcome?

Who Are the Arbitrators?

The majority of big business arbitration cases are handled by the National Arbitration Forum, the American Arbitration Association, and JAMS, all of which employ lengthy lists of professionals in law and other fields. The National Arbitration Forum (NAF), a for-profit company based in Minneapolis and one of the nation's largest private arbitration firms, specializes in resolving claims by banks, credit-card companies, and major retailers that contend consumers owe them money.

According to an article in Business Week, the NAF, which dominates credit-card arbitration, operates a system in which it is exceedingly difficult for individuals to prevail. It goes on to state some current and former NAF arbitrators say they make decisions in haste based on scant information and rarely with debtor participation. Consumers who have been through the process complain that NAF spews baffling paperwork and fails to provide the hearings that it promises.

Recently, the Minnesota's attorney general sued the NAF alleging the company had business ties to major collection firms and was not being the impartial arbitrator it had claimed to be. NAF agreed to stop handling consumer cases, and, in the wake of the scandal, several major credit card issuers agreed to temporarily stop enforcing the mandatory arbitration clauses in their contracts.

Can You Avoid Mandatory Arbitration?

Some basic guidelines you may want to consider regarding mandatory arbitration include:

  • Educate yourself. Review 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.
  • Try a credit union or smaller bank to find a credit card that doesn't require this. AARP says its cards do not require the clause.
  • Read the correspondence you receive in the mail regarding "changes in terms" from your credit card companies so you are not caught off guard.
  • If obtaining a new credit card that includes mandatory binding arbitration, sign an arbitration opt-out if one is available or strike the clause from the contract and initial the change.
  • Reduce credit card debt as much as possible to avoid costly fees, penalties and credit disputes.
  • Voice your disagreement and reason for switching credit cards to your bank if applicable.

What if You Are Faced With Arbitration?

If you are faced with a situation requiring arbitration, you may want to:

  • Get your credit report¬†and make sure there are no errors; address any errors immediately.
  • Verify that your debt has not passed the statute of limitations for your state.
  • Read and respond immediately to all correspondence you receive from an arbitration group.
  • Research the arbitrator assigned to your case. Depending on the creditor making the claim against you, you may have the right to object. Consider striking any arbitrator who's a "creditors' rights" attorney.
  • Consider hiring a lawyer. An attorney for either a court or an arbitration case may cost more than it's worth if the debt is only a few thousand dollars.
  • Try to settle. Neither arbitration nor litigation is cheap. A debtor may have to pay thousands of dollars in attorney's fees tacked on by the creditor. So if you owe the money and the debt isn't old, negotiate with the collection agency or debt buyer. They probably bought your debt at a greatly reduced rate and may agree to a reduced payment.

Binding mandatory arbitration clauses in credit card, employment, and insurance contracts force individuals to forfeit their right to a trial by judge or jury. Mandatory arbitration does not help ordinary people, but benefits big corporate interests like national banks and insurance companies. It is used as a means to evade accountability for any harm they cause or laws they break - laws meant to protect consumers and employees. Protect yourself!