Advertiser Disclosure

Credit Card Companies Soften Mandatory Arbitration Rules

Dec. 12, 2013
Credit Card Basics, Credit Cards
At NerdWallet, we strive to help you make financial decisions with confidence. To do this, many or all of the products featured here are from our partners. However, this doesn’t influence our evaluations. Our opinions are our own.

Chances are, you’ll probably never find yourself in a situation where you’ll want to sue your credit card company. But if you did, you likely discovered something strange: you couldn’t. At least until now.

Previously, most credit card agreements prevented customers from being able to take them to court with what’s called mandatory arbitration. But due to recent legislation and an investigation by the Consumer Financial Protection Bureau (CFBP), many credit card issuers are changing their tune.

So what should you know about changes to the rules regarding taking legal action against your credit card issuer? Take a look at the information below for the details:

Signing away your right to fight

Up until very recently, whenever you got a new credit card and signed the agreement that went along with it, you were likely also signing away your right to take the credit card issuer to court. Worse, you were also forfeiting your ability to start or join a class action lawsuit against the company.

All this is because most credit card agreements contain what’s known as a mandatory arbitration clause. These clauses state that if a customer has a problem with the credit card company, the dispute is required to be settled by an arbitrator, not a court. This is because going to court can be very expensive for credit card companies, and class action suits are a public relations nightmare. For these reasons, credit card issuers force their customers to settle disagreements through a different channel.

Arbitrators are supposedly neutral parties, but many consumer advocates feel that they are hardly free of bias – after all, they are usually hired by the credit card companies. A study from 2007 by Public Citizen supports this idea; it found that consumers lose cases brought to arbitration at a rate of 94%.

What’s more, if you lose a case in arbitration, you can’t appeal it. All this amounts to a system that was very heavily weighted in favor of the credit card company.

» MORE: How to Dispute Fraudulent Credit Card Charges

The government steps in

In the years following the economic meltdown of 2008, the federal government passed a number of laws to help regulate the financial services industry. The CARD Act of 2009 went far in protecting consumers from huge credit card fees, but didn’t make any mention of credit card arbitration rules.

However, the Dodd-Frank Act of 2010 gave the CFPB permission to investigate the issue. The CFPB has been conducting research about the mandatory arbitration clauses contained in credit card agreements since that time and is expected to issue new regulations in early 2014.

Many credit card issuers are expecting that CFBP will force them to end the practice; after all, it put an end mandatory arbitration for mortgages already.

Moving beyond mandatory arbitration

Although the CFPB has yet to put out new rules about mandatory arbitration, many credit card companies are already taking steps to give consumers more options.

For example, American Express now allows customers to opt out of its mandatory arbitration clause if they send written notice to the company within a specified deadline. If you opt out, you can now go to arbitration if you want to, but court and mediation are also possibilities. Recently, other credit card companies have made similar moves. Bank of America has announced plans to drop the mandatory arbitration clause from its credit card agreement altogether.

When possible, it’s still best to try to settle issues with customer service representatives. In fact, many credit card companies are making an effort to empower their customer service departments and increase their ability to resolve consumers’ issues.

The takeaway: if you find yourself in a situation where you need to reconcile a problem with your credit card company, you’ll soon have more options to do so. Of course, it’s better to clear up disagreements through other channels if possible, as taking legal action can be costly. Do your best to negotiate and be reasonable – it could end up saving you a bundle!

Gavel image via Shutterstock