The Truth About Arbitration of Credit Card Debt

A report issued by consumer watchdog group Public Citizen talks about the numerous problems with arbitration clauses in consumer transactions in its comprehensive report, “The Arbitration Trap—How Credit Card Companies Ensnare Consumers”.

Public Citizen’s conclusion? “This report shows that binding mandatory arbitration is a rigged game in which justice is dealt from a deck stacked against consumers.”

Arbitration can be a wonderful way for both sides to a dispute to save money and get a speedy resolution of disputes without resorting to the Court system. In business transactions, arbitration is the norm, and all sides benefit. Unfortunately, arbitration’s record in consumer situations is much less than stellar.

The main problem is that, while in business deals, both parties are usually sophisticated players having roughly equal bargaining power, the opposite is the case in consumer transactions. In the consumer credit world, the credit card companies literally hold all the cards. They set the terms of agreement, can change the terms at any time, for any reason, and (unless forced to) rarely, if ever, change them in a way that is favorable to anyone but them. One of the changes they have made is to require arbitration of all disputes between the card issuer (Capital One, Bank of America, CitiBank) and the cardholder (you). The biggest problem? The card issuer picks the arbitrator who will hear the case.

This is a problem because if an arbitrator doesn’t consistently rule in favor of the card issuer, he or she won’t get any more arbitration cases from them. When credit card arbitrators can earn upwards of $1,000,000 a year for their work, this is a substantial incentive not to bite the hand that feeds them. It is also a substantial incentive to handle as many cases as possible, even at the expense of a careful consideration of the merits of each individual case.

The study notes that one arbitrator, Joseph Nardulli, handled 1,332 arbitrations over a 46 month period. He ruled for business 97 percent of the time awarding $15 million, and for the consumer only 1.6 percent of the time.

Getting this sort of information is nearly impossible, for consumer arbitrations are performed in secret, with no oversight, no review, no appeal, and no explanations. Only one state, California, requires arbitration firms to reveal any information at all about their use of arbitration and the win-lose rate of corporations and consumers. In the others, patterns of abuse, incestuous relationships between the credit card company and the arbitrators, and lack of protections are hidden. The study quotes an arbitration expert as stating, “The business defendant resolving disputes secretly knows all about any successful claims and can guide itself accordingly while his or her adversary negotiates in ignorance.”

This report should be read by all consumers to let them know what they’re up against, and how to fight it.