Don’t get caught by this credit card trickery

Jean Chatzky TODAY Financial Editor • Profile • E-mail

Let’s say you had a disagreement with your credit card company. You say you paid a bill. They say they didn’t receive a check — and not only do they slap you with a $29 late fee, they boost the interest rate on your account to 24 percent. You are outraged, so outraged that you decide you’re going to sue. Not too hard to imagine, is it?

But get this — even though you want to sue, chances are you can’t. Why? Because sometime over the past couple of years, your credit card company changed the rules on you. It let you know (often with a throwaway stuffer in one of your statements) that any disputes between the two of you had to be resolved by mandatory binding arbitration. By continuing to use the card, you tacitly agreed to this change and now, well, now you’re up a creek without a paddle.

The country’s leading consumer advocates are up in arms about this because it’s not just your credit card company that’s foisting mandatory binding arbitration upon you and me. It’s mortgage lenders, car dealerships, telephone companies, wireless providers. It’s health insurers, employers and franchisers. It’s companies that don’t want to put themselves at the risk of lawsuits, particularly class action lawsuits, that could cost them a bundle.

Unfortunately, going through the arbitration process can be much more expensive for you than filing suit in small claims court. According to The National Arbitration Forum, it costs an average of $800 to $900, which is going to make you think twice about arguing that $29 late fee.

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Consumer advocates would like you to write letters to your representatives in Washington, demanding that they do work to rid the country of what the National Consumer Law Center’s Steve Tripoli calls “the number one threat to consumer rights today.” For the record, I agree. But changing laws takes time. In the interim, what can you do?

Read the fine print. You need to know what you’re up against. Some arbitration clauses are better than others. A fair arbitration clause will limit the fees you’ll face in arbitration, the distance you have to travel to arbitrate a claim and give you some choice in the arbitrator.

Try to opt out. If notification of mandatory binding arbitration comes as a notice in your credit card bill or phone bill, your continued use of that card or phone service is a tacit agreement that you agree. Instead, try to opt out. Some credit card companies give you a specific protocol for opting out. If yours does, follow it to the letter. If yours doesn’t, then you can try crossing out the language and returning the contract to the company. Or, you can include your own opt out notice with the payment you return to them. A few years back in Alabama, a woman named Margo Rebar sent a little slip of paper with her credit card bill informing her card provider that she would not be subjected to mandatory binding arbitration. The Supreme Court of Alabama backed her up. Now you can print out a similar notice at www.stopbma.com/bma-takeaction-regularbills.htm. There’s no guarantee it’ll work, of course, but it’s worth a try.

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Do business with credit unions and small banks. Credit unions and small banks are less likely to include arbitration in their contracts with consumers than the country’s largest card issuers. If you’re shopping for a mortgage, make sure it qualifies to be sold on the secondary market to either Fannie Mae or Freddie Mac. This is a fairly recent development (and a big victory for consumer advocates), but they don’t allow these clauses into their contracts either. And if you’re buying or financing a car, make it a point to ask whether an arbitration clause is part of the deal. If so, it’s in your best interest to do business elsewhere.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, www.JeanChatzky.com.

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