Credit card arbitration: What it is, how it works
About half of cardholders are barred from court in a dispute
If you're like many Americans, you've given up the right to
sue in the event of a dispute with your credit card company. As of December 2013, about half of
credit card balances are subject to requirements that
disputes be resolved via arbitration, an alternative to the
court system with streamlined procedures
and fewer protections for participants.
Arbitration is frequently used by employers and service
providers such as phone companies, as well as by banks and card issuers. The
process involves a neutral third party, often a retired judge, who hears arguments
from both sides and issues a decision. The decision is enforceable in court, meaning
it may be used to garnish wages or seize assets.
Since 2009, credit card issuers have mostly shifted their
cases to two arbitration groups, the American Arbitration Association and JAMS
The Resolution Experts, formerly called Judicial Arbitration and Mediation
Services Inc. Both organizations require
special protections for consumers -- such as capped filing fees -- as part of
Outside of the banking arena, financial services such as
payday lenders and debt settlement companies generally use other arbitration forums.
"Less-reputable businesses make the consumer travel
long distances or have loser-pays provisions," said Paul Bland, senior
attorney at Public Justice. Under loser-pays, the consumer could be liable for
all hearing fees and filing fees, creating a chilling effect on the filing of a
Credit cards that require arbitration generally make two
important exemptions: Debt collection actions, and disputes small enough to be
heard in small claims court in the jurisdiction where you live. Consumer debt
collection "was a problematic caseload," said Richard Naimark, senior
vice president of the American Arbitration Association. The organization
dropped collection cases in 2009.
Pre-dispute arbitration requirements say that either side --
you or the card company -- can require a dispute to be heard through
arbitration instead of court. Here are answers to common questions about arbitration,
based on card agreements and materials published by AAA and JAMS, as well as interviews
with legal experts and arbitration services.
Does my card require
Among major, general purpose card issuers, Chase, Bank of
America and Capital One have dropped arbitration requirements. American Express
and Discover require arbitration but have an opt-out clause for new customers, providing they write a letter to the company within about a month after receiving or using the card.
Wells Fargo, U.S. Bank and Barclays require arbitration. Most store cards
require arbitration, while most credit unions do not. To make sure, ask your
card issuer for a current copy of your card agreement. Template agreements at
the U.S. Consumer Financial Protection Bureau's database are also available;
however, the database carries a disclaimer that individuals are governed by
their specific agreement.
How does it work?
Disagreements that can't be solved through discussion
between the card holder and the company are candidates for arbitration. The
process begins when you or the company files a claim form with the arbitrator,
sending a copy to the other side. Check the website of JAMS or the AAA for
forms and instructions. Depending on the circumstances, there may be an
in-person hearing, a hearing by telephone, or the arbitrator may decide the
case by looking at written submissions and supporting documents, without a
What does it cost?
Companies pay filing fees if they launch the claim. If the
consumer initiates the claim, filing fees are capped at $200 under AAA and $250
under JAMS, and the company must pick up the subsequent arbitrator's fees.
Check your card agreement to find out whether the company will subsidize fees
you pay. Most will pay at least the portion of filing fees above what a court filing
would cost. Some will advance you funds to cover costs such as expert witnesses,
and will pick up attorney fees if you win the case. Other card agreements state
that each party will pay their own costs regardless of the outcome.
How long does it
AAA said document-only cases finished in about four months,
while cases involving in-person hearings took about six months, based on a
study of cases heard in 2007. Forty-one percent of consumer arbitrations were
Where are hearings
JAMS requires that consumers have a right to a hearing in
their hometown area. The AAA requires the location to be "reasonably
convenient" to both sides. The arbitrator can decide the location if the
parties cannot agree. Several card agreements give you the right to a hearing
in the federal judicial district where you live.
How is arbitration
different from court?
In court, rules of evidence govern the process, and people
who feel they were wronged can compel corporations to provide copies of confidential
documents. Cases may be heard by a jury, and decisions can be appealed to a
higher court. In arbitration, the arbitrator has more latitude to decide what
evidence to consider, and may not be bound by consumer protection law.
Decisions are generally not open to appeal, although some card agreements
provide for a review by a panel of arbitrators. Consumers can represent
themselves or hire an attorney, although relatively few lawyers will take arbitration
Related story: CFPB report: Biggest card issuers push consumers into arbitration
Updated: December 24, 2013