The Supreme Court this week issued a ruling that could have negative consequences for consumers struggling with credit card debt. According to the new ruling, credit card companies and other lenders (with the exception of mortgage lenders) can continue to include arbitration clauses in their agreements.

In order to understand why so many consumer advocates are outraged over the decision, it’s essential to understand what arbitration clauses are and how they work (hint: it’s almost always against the interest of consumers).

Understanding Arbitration Clauses

In essence, arbitration clauses are bits of legal language in a loan or credit card agreement that say all disputes concerning loan repayment terms must be settled in arbitration rather than taken to court.

Because these clauses are part of loan contracts, consumers must agree to them in order to get access to most loans—including credit cards, student loans and others.

But the arbitration process, which is consumers’ only recourse for disputes over credit card charges and fees, has been shown to be unfair to consumers. Here’s why:

• Most consumers aren’t even aware of the arbitration clause or what it means. While it is a consumer’s responsibility to read through loan agreements in full, credit card companies do not make this process easy, even for those with lawyers, who are trained to read and decipher legal language.
• Few consumers realize the arbitration process is taking place. Notifications about the beginning and end of an arbitration case arrive in the mail, and may look like ordinary statements (or junk mail!) from a credit card issuer. Consumers who don’t open these letters will never know that arbitration is taking place, because their consent is not required to start the arbitration process.
• Arbitrators almost always side with the credit card companies. A study of California’s arbitration data (other states did not release their data to the public) found that arbitration cases were decided in the creditor’s favor in 99.98 percent of conflicts – a startling majority that suggests the process is not entirely unbiased.
• Arbitrators are financially incentivized to side with credit card companies. In fact, the process is not unbiased, many consumer advocates argue. Because many credit card companies pay arbitration firms to handle disputes, the latter are financially dependent on the former for their existence. Arbitrators who side too often in favor of consumers risk losing the favor of the powerful entities that write their paychecks.

Hope on the Horizon?

While the Supreme Court’s decision may seem pretty bleak for consumers right now, news analysts have noted that there remains hope for the future. The recently created Consumer Financial Protection Bureau could potentially undertake the task of analyzing the effects of arbitration clauses – and may, as a result of its findings, enact stricter rules about when and how they can be used.