Credit Card Arbitration Clause Latest Challenge for Issuers

This is a guest post by Bill Hardekopf, CEO of LowCards.com.

The arbitration clause, an important but often overlooked provision in credit card agreements, is now being legally challenged and could be banned by the proposed Consumer Protection Agency. How this is resolved could result in higher legal costs for credit card issuers and, likely, higher rates and fees for cardholders.

Credit card issuers use arbitration as a way to collect disputed debt from cardholders. According to Chase, they use arbitration when an account has been charged-off after six months of non-payment and when the customer has provided a written notice not to call them and wants to deal only with a third party representative. Chase says that accounts in arbitration represent 1.5% of its accounts in default.

When cardholders apply for a credit card, arbitration is mentioned, and can be easily lost in the fine print. Some issuers give cardholders 30 days to reject arbitration, but this is a point that is probably overlooked or forgotten by many applicants. As an example, here is Discover’s arbitration clause:

“The Cardmember Agreement provides that we may choose to resolve a claim relating to your account by binding arbitration, in which case, you will not have the right to have that claim resolved by a judge or jury and you will not have the right to participate in a class action in court or arbitration. You may reject the arbitration provision with respect to your new account within 30 days after receiving your card.”

The issuers want disputes handled by arbitration because it holds down their legal costs by settling out of court. The system also works in their favor. According to The National Arbitration Forum, in debt collection matters, the lender usually always prevails, almost 94% of the time in arbitration and 96% in court.

The arbitration clause has been part of the credit card contract for years. However, last week the Minnesota Attorney General filed a lawsuit alleging that the National Arbitration Forum (NAF) was too closely tied to creditors and showed a bias towards them in arbitration between consumers and credit card companies. The Consumer Protection Agency, proposed by the Obama Administration, is also considering a review and ban of mandatory arbitration clauses as part of its push for wider consumer protections.

As a result, two major firms, the American Arbitration Association and National Arbitration Forum, have withdrawn from arbitrating consumer credit disputes. Now, there is some uncertainty about how new disputes will be handled. Other companies could step in, but that will take time. It may also be difficult to fill the void left by the two large firms.

If arbitration is banned, the credit card issuer and cardholder will have to settle disputes in court. This could be costly for both sides and cause a number of lawsuits. The other possibility is a reformed arbitration system that will be more friendly towards consumers, allowing them to choose the location and forum and give them the opportunity to appeal.

“Legal disputes is another issue that could increase the cost of lending for issuers. As we have seen, when their costs and risks increase, issuers usually pass these on to cardholders in the form of higher rates and fees,” says Bill Hardekopf, CEO of LowCards.com and author of The Complete Credit Card Guidebook. “The good news is that it may help cardholders who have legitimate disputes with issuers.”

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LowCards.com simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1260 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.