Every now and then, I read something that makes me gasp. It happened just recently, when I learned about a Public Citizen report on arbitration in the credit card industry. Here's how it began: "Consumers who seek justice in disputes with their credit card companies shouldn't expect to find it in binding mandatory arbitration (BMA); in cases decided in California by a major arbitration firm over a four-year period, consumers lost 95% of the time." Yowza.

Now, arbitration sounds fair, doesn't it? Here's part of one definition I ran across online: "The hearing and determination of a dispute by an impartial referee agreed to by both parties (often used to settle disputes between labor and management)." See? Fair -- an impartial referee.

But unless the vast majority of card holders with credit card issues are misguided, then something seems wrong. That 95% sure suggested a dirty little industry secret. And the more I read, the more it seemed that was the case. Check out this information from the report:

  • What are these disputes that consumers are losing the battles on? Most were collection issues. The credit card company says that you owe it money, and then it seeks to get that money through an arbitration judgment.
  • There's a single firm, the National Arbitration Forum (NAF), that's a top dog in arbitration for the credit card industry. In the California cases studied, the NAF ruled in favor of the credit card companies some 95% of the time. Interestingly, "90% of the NAF cases were handled by just 28 arbitrators, who awarded businesses $185 million. One arbitrator handled 68 cases in a single day -- an average of one every seven minutes, assuming an eight-hour day -- and ruled for the business in every case, awarding 100% of the money requested." If mine was one of those 68 cases, I sure wouldn't feel as though I got a fair shake.
  • The study wasn't a small one. It focused on activities in the reasonably sizable state of California and examined more than 33,000 arbitration cases from a period of more than three years.

It gets worse
You might be thinking to yourself, "Fine -- I'll skip arbitration and take any dispute I have to court." Well, think again. It turns out that in the fine print you generally agree to when you sign up for a credit card (and for many other things, including cell phones and even employment), you're agreeing to arbitration. You're also giving up the right to a trial with a jury of your peers.

Making matters worse is the conflict of interest involved. The credit card companies get to choose the arbitrator, which is typically a firm that makes a heck of a lot of money from the credit card company. In such a scenario, the arbitrator clearly has some incentive to rule for the company, not for us.

Can it get worse than this? You bet -- not only are you often slapped with a decision to fork over whatever the card company says you owe, but you also pay to participate in this arbitration system. It can cost $1,000 or more.

Some people, unsurprisingly, are not happy about this state of affairs. "People shouldn't have to give up their legal rights just to get a credit card," says Public Citizen President Joan Claybrook.


It gets better
The good news is that Congress is looking into this sorry situation. Sen. Russ Feingold (D-Wis.) and Rep. Hank Johnson (D-Ga.) have introduced the Arbitration Fairness Act of 2007 (S. 1782 and H.R. 3010, if you want to look them up). The act aims to give us a choice between arbitration and the traditional civil court system, "by requiring that agreements to arbitrate employment, consumer, franchise, and civil rights disputes be made after a dispute has arisen." As the folks at Public Citizen have noted, "The act would prevent a party with greater bargaining power from forcing individuals into arbitration through a contract."

Consider yourself urged to contact your congressional representatives and let them know what you think of this topic and the pending legislation.

In the meantime, according to Consumer Reports, here are some credit cards that seem to have decent records for handling consumer problems:

  • USAA Federal Savings
  • Cards issued by credit unions
  • American Express (NYSE:AXP)
  • Discover Financial Services (NYSE:DFS)

And these have not-so-attractive ratings for problem resolution:

  • Providian, owned by Washington Mutual (NYSE:WM)
  • Capital One Financial (NYSE:COF)

Learn more
Learn much more about the surprisingly interesting credit card industry by visiting our Credit Center, which also features tips on getting out of debt, along with guidance on how to manage your credit effectively. And check out these articles:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.