Fine print, Protecting yourself

Why I opted out of credit card arbitration – and you should too

Fred Williams
Why I opted out of arbitration - and you should too

For the most up to date information, see this article on how to avoid mandatory arbitration.

When I signed up for my Citi Double Cash card, I was torn. I liked the 2 percent reward rate, without the headaches of a points system.

But Citi is one of those cards that requires you to sign away your legal rights when you sign the account agreement. Under its mandatory arbitration clause, disputes cannot be taken to court. Instead, they must be submitted to a privately administered, non-public arbitration system. And banding together with other customers in a class-action lawsuit is forbidden. A July 10 rule by the Consumer Financial Protection Bureau would restore consumers’ right to group action, but it is the target of a repeal effort in Congress.

“[Y]out cannot go to court, have a jury trial or initiate or participate in a class action if you have a dispute with us,” my account agreement proclaims.

Fortunately, there was a loophole. By sending a letter to the bank within 45 days of opening the account, I could reject the arbitration requirement. I did, and got an acknowledgment explaining that the rest of my card’s features were unaffected by my choice. I pay the same interest and get the same rewards as everybody else. The letter also reminded me that arbitration requirements on any of my other Citi accounts remained in effect.

Yes, other accounts. It’s not just credit cards. Arbitration requirements that shield companies from legal action are common in bank deposit agreements – as well as car loans, private student loans, payday loans and other consumer contracts.

At least with my Citi card, it wasn’t hard to resolve my qualms about signing up. For the price of a stamp and a trip to the mailbox, my rights to the legal system were restored. It felt like a bargain, and the card works just fine without the arbitration clause behind it. (Most credit card issuers that include mandatory arbitration clauses in their card agreements offer a fine-print escape hatch. See if your card has an arbitration clause, and how to opt out.)

It takes a village to take action
But my individual action has limited effect. I’m still unlikely to take Citi to court for a minor dispute. For example, it wouldn’t make sense to lawyer-up over $91.15. That was the average amount that the U.S. Consumer Financial Protection Bureau found that Citi collected from people enrolled in its credit monitoring service, for which it was fined by the CFPB in 2015 for deceptive practices.

But with 2 million cardholders dinged for an estimated total of $196.8 million, banding together in a class action with other cardholders would make sense. It will take some critical mass of other Citi cardholders – at least in the thousands – to opt out of arbitration for such group action to be viable.

For that reason, opponents of arbitration call the opt-out clause an empty gesture. “I think it’s basically a trick to create the illusion of choice,” said Jeff Sovern, a professor at St. John’s University School of Law in New York, who has studied arbitration clauses in consumer contracts. Most consumers don’t understand the arbitration clause, or even know it is buried in the fine print of their contract, he said. A minuscule number of customers take advantage of it. “They don’t make it easy to opt out,” he said. Court cases contesting arbitration clauses uncovered that less than 1 percent of consumers covered by an arbitration clause opted out.

Then again, opting out of credit card arbitration is not particularly difficult either. A brief letter, a stamp, a trip to the mail box. If you’ve ever mailed in a rebate form for a coupon, you have a pretty good idea what’s involved. Preserving my right to have my day in court seemed worth the trouble. If enough other people see it that way, arbitration clauses will lose their power to block group action.

Or, even simpler – people could just stick with cards that don’t make them sign away their legal rights. That includes issuers such as Bank of America, Chase Bank, Capital One, plus many small community banks and most credit unions. Voting with your feet is another powerful way to exercise consumer choice.

See related: DIY credit card arbitration: You may be able to opt out, Financial illiteracy has cost me thousands

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