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What Is Credit Card Arbitration?
by Marissa Willman
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Overview
What Is Credit Card Arbitration?
Starting in the early 2000s, credit card holders began receiving notices of changes to their credit card terms which included mandatory credit card arbitration. The industry standard for handling credit card disputes soon became mandatory credit card arbitration, which is mediated by a third party. The legality of credit card arbitration has been widely questioned by consumers.
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Function
Credit card arbitration provides a third-party mediator for disputes between credit card companies and cardholders. Mandatory credit card arbitration clauses are included in the fine print of credit card terms so that all disputes are handled outside of court. The function of credit card arbitration ensures that the credit card company will receive some sort of monetary compensation for a delinquent account. Arbitration is carried out by a third party to maintain fair treatment of both parties, as well as a mutually agreeable settlement.
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Usage
The mandatory arbitration clause is typically invoked by credit card companies to settle delinquent accounts that have been unpaid for months or years. Credit card companies tend to utilize arbitration for accounts with a large sum of money owed, in an effort to regain at least some of the debt. Credit card holders may also choose arbitration to dispute charges resulting from fraudulent activity or identity theft. Other terms that can disputed through arbitration include interest rates, late fees and annual fees.
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Advantages
According to a 2008 report released by the U.S. Chamber Institute for Legal Reform, advantages of arbitration over litigation include historically better settlements for the consumer, quicker proceedings and fewer out-of-pocket expenses. An arbitration meeting can be settled in a few hours or days, depending on the case, whereas court proceedings can take months or years. Arbitration may also be cheaper than litigation, since there are no attorney fees or court costs.
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Disadvantages
The consumer-rights organization Public Citizen published a report in 2007 that outlined the disadvantages of credit card arbitration. According to the report, credit card arbitration rarely finds in favor of the cardholder. Arbitration also restricts the consumer's right to have the case heard by the justice system. Since the arbitrator is not a judge, he is not necessarily bound by law. The rights to appeal a decision or to file a class-action lawsuit are also restricted.
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Legality
Consumers have tried to fight mandatory credit card arbitration clauses since they became the industry standard around 2001. In 2003, a Maryland woman filed a class-action suit against Discover, claiming that the company's fees and interest rates were illegal. Discover claimed the woman was bound by the mandatory arbitration clause included in the terms of the credit card agreement. In 2009, the case went to the Supreme Court, which ruled that federal courts could not force arbitration. As a result, the lawsuit was allowed to be heard in state court. In 2009, a bill was introduced to the House of Representatives to ban mandatory credit card arbitration clauses.
