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Credit Card Shopping? Look for One with No Arbitration Clause or Ability to Opt Out [STUDY]

March 11th, 2015 · No Comments · Consumer Info

by Kristy Welsh

(Last Updated On: February 26, 2018)

Credit Card Shopping? Look for One with No Arbitration Clause or Ability to Opt Out [STUDY]When you’re comparing credit card offers, what are you looking for? The best interest rate? No annual fee? Rewards relevant to your spending habits and lifestyle? No arbitration clause?— Wait, what?

If I had you until no arbitration clause, you’re not alone. In a study by the Consumer Financial Protection Bureau (CFPB), not a single respondent said they consider a credit card based on whether there is an arbitration clause in the agreement. But as evidenced by other findings in the study, clearly that’s a criterion we should all add to the list.

Credit Card Arbitration Agreements

When an arbitration clause is included in a credit card agreement, either party can elect to have a dispute resolved outside of the court system. Unfortunately, the CFPB study found that arbitration clauses do far more good for credit card companies than consumers:

“In cases where credit card issuers with an arbitration clause were sued in a class action, the companies invoked the arbitration clause to block class actions 65 percent of the time.”

Translation: Consumers are missing out on millions of dollars they would otherwise be entitled to if the arbitration clause did not allow credit card companies to block class action lawsuits.

Other Markets In Which Arbitration Hurts Consumers

Credit cards are just one of numerous financial products and services with arbitration clauses. The CFPB also included in its study checking accounts, prepaid cards, private student loans, payday loans, and mobile wireless service.

The CFPB study found that:

  • 53 percent of credit card issuers use arbitration clauses
  • 44 percent of banks and credit unions use arbitration clauses for checking accounts
  • 92 percent of prepaid card issuers use arbitration clauses
  • 86 percent of the largest private student loan issuers use arbitration clauses
  • 99 percent of payday loan lenders use arbitration clauses (though the study was limited to lenders in California and Texas)
  • 88 percent of mobile wireless service providers use arbitration clauses

What’s worse is:

  • More than 75 percent of consumers don’t know if an arbitration clause is included in their agreement.
  • Fewer than 7 percent know that an arbitration clause restricts their ability to sue the company.
  • A shockingly small percentage of consumers initiate arbitration: “Consumers filed roughly 600 arbitration cases and 1,200 individual federal lawsuits on average each year in the markets studied.”
  • By contrast, “roughly 32 million consumers were eligible for relief through class action settlements in federal court each year.”

What to Do About It

Avoid arbitration clauses if you can. This means reading the fine print, of course, but it’s well worth the extra time and effort if and when a dispute arises.

Only a little more than half of credit card issuers include arbitration clauses in their agreements, so shop around for one without. That said, a quarter of credit card companies with arbitration clauses allow you to opt out from the get-go. Look for similar opportunities through other financial products and services. Though not included in the CFPB study, this approach should extend to the credit bureaus. Here’s how to opt out of arbitration after purchasing your credit reports (not necessary when you receive your reports for free).

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