The Hidden Danger In Your Credit Agreements
It’s there on every credit card agreement, usually in very, very tiny type, and sometimes buried in envelopes that contain other distracting information. It’s a hidden clause that you may not give too much thought about when signing up, but it’s a killer if you wind up in its clutches.
We’re talking about “arbitration,” a process increasingly favored by the credit card companies, and if you hit Control + F on electronic copies of your agreement, you’ll usually find it tucked away in the form.
What it means is that, should you have a dispute with your credit card company, you will agree not to head to court. Rather, you will go through a process known as “arbitration,” which is a dispute resolution process that is done outside the court system.
Arbitration is a hearing in front of a neutral third party who will settle the dispute. There are two U.S. companies that are the big players in the field – the American Arbitration Association and something called JAMS The Resolution Experts. In addition to credit card companies, these services are used by utilities, banks, loan companies and others who have extended credit or a service to someone, and then fallen into a dispute on who owes whom.
HOW IT WORKS
So, what happens if you head to arbitration? For one don’t expect the case to drag on. Arbitration is favored by companies because it has streamlined procedures for resolving disputes. The process involves an arbiter – often a retired judge – who hears arguments from both sides of the dispute and then issues a ruling, typically within four to six months. The results are enforceable by law, which means you could be subject to seized assets or wage garnishment.
Sometimes, arbitration can be a good thing. The filing fees are capped and the process generally moves faster than the court system. But costs can rapidly escalate. It can cost a couple hundred dollars to file a case in county court, but it can cost several thousand dollars for an arbitration hearing, and even more if the dispute is heard by a panel of arbiters rather than a single decider.
Some arbitration companies have ties to banks and credit card companies, which makes them less than neutral when determining your case. And some companies try to have their cases moved to hard-to-reach locations and to hold hearings at times that may not be convenient to working people.
There’s also something called the “loser pays” rule, which means that the person who doesn’t win their case could be responsible for all hearing and filing fees. If you’re already struggling, that’s a big disincentive to bring the case to arbitration.
The arbitration process is less formal than a courtroom. In court, you can compel your opponent to provide copies of documents to back up their case, and you can request a jury and have any adverse decision appealed. In arbitration, the arbiter decides which evidence is necessary, and there is usually no appeal of the ruling. Consumers involved generally represent themselves, since most attorneys won’t take arbitration cases, seeing little profit in them.
REPORT CLAIMS “UNFAIR”
A 2009 report from the Center for Responsible Lending (CRL) said arbitration can be unfair because of those prior relationships between institutions and the arbiters. The report cites research from Public Citizen, a non-profit watchdog group, suggesting that consumers win only about four percent of arbitrated disputes. “The relationship as currently structured gives arbitration forums and arbitrators a strong incentive to side with “repeat players” that control the flow of ongoing business, rather than a consumer seen only once,” the CRL report states.
Arbitration ruling results are typically murky, and not every state has laws that reveal which side won a case. However, Public Citizen determined that the “vast majority” of cases involve credit card debt, with MBNA and Chase Bank the two largest companies involved in arbitration cases. Public Citizen determined there were 34,000 arbitration cases heard between 2003 and 2007. Since arbitration is generally considered to be on the rise, there’s no doubt that number has risen since those years.
The arbitration hearings are held in private, which can be good for the privacy minded. However, that same secrecy means that fairness is in the eyes of the parties assembled. As noted, you may not be happy with the decision and wind up with little avenues to continue pursuing your claim.
Fortunately, the government is starting to take notice of some of the inherently unfair practices associated with agreements that stipulate arbitration. The recent Wells Fargo case where unauthorized accounts were opened has led to further scrutiny of the arbitration requirements, and Sen. Al Franken of Minnesota has been active in opposing arbitration measures he deems unfair.
You can opt out of mandatory arbitration clauses in some agreements, although the consumer Financial Protection Bureau claims that only a quarter of cards allow this bypass.
The best way to avoid the issue is to read your agreement. Although most people would rather have crows peck at their eyes than read fine print financial agreements, it’s one of those necessary chores that you’ll be thankful for when trouble hits. This is particularly valuable advice when a company switches the terms of its contracts.
Keep in mind that arbitration agreements are usually buried, vague and confusing. But they aren’t more inconvenient or expensive than the process you’ll have to endure if you find yourself in a major dispute with your card company.
If you are opting out, read the opt-out instructions carefully, make sure you include the pertinent information in your letter to the company, including your account number and contact information. Keep the letter short, sweet and to the point, and make sure you send your letter certified with a return receipt, so that you have a record. Then follow-up with the company to make sure it was received and that your wishes to opt-out have been noted.
The steps may be somewhat convoluted and confusing, but think of it as insurance. If you wind up in a dispute with your credit card company, you’ll want to have options. By signing away your rights at the outset of the relationship, you’ve limited your recourse. And that’s never a good thing.
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