MONEY credit cards

3 Things Millennials Need to Know When Choosing a Credit Card

hand choosing credit cards from a fan of cards
David Malan—Getty Images

Here's what young adults should consider when they finally bite the bullet and sign up for a credit card.

Today’s young professionals have a complicated relationship with credit. A report last year found that more than three in five millennials did not own a credit card, while another survey, by Creditcards.com, found that 36% of 18-to-29 year olds have never had one.

Millennials, of course, had the distinct misfortune of entering the job market during the greatest recession in generations, which may have made the prospect of borrowing less appealing, says Creditcards.com senior industry analyst Matt Schulz. Unemployment can make the task of paying off your monthly bill rather onerous.

Nevertheless, those in Gen Y who eschew plastic endure real costs that can make borrowing later in life that much more difficult. “Credit scoring models look at the age of your credit history,” says Credit.com’s Gerri Detweiler. “Specifically they take into account the age of your oldest account, and the average age of all of your accounts.” The earlier you start, the better your score will be. And a higher credit score can save you thousands over the course of your life.

If you’re ready to take the plunge, here are three things to consider when you pick and use your plastic. (These are also good reminders for those who already carry a card.) Remember, credit cards are tools and can dramatically improve your bottom line when used correctly.

1. Make sure you reap the credit

One chief benefit of receiving a card is proving to the world that you can be responsible with credit. However, if your lender doesn’t actually report your pristine credit behavior to a credit bureau, you won’t get the benefit of a higher score. “Ensure that your card reports account activity to the three major credit bureaus—which it should if it’s issued by a major bank and is a Visa, Mastercard, or American Express card—so that this first card can help build a credit history,” says Ben Woolsey of CreditCardForum.com. You can confirm this with your lender before you sign up for the card.

2. Skip the annual fee

“Get a credit card with no annual fee, since the first card you will get will be the card you keep the rest of your life to maintain a long credit history,” says Nerdwallet.com’s Kevin Yuann. The point here is that you don’t want to be penalized for establishing credit. But when you finally get that more elite card, don’t get rid of the original. “As you start to qualify for better rewards, keep a phone bill or something recurring on automatic payment on this card to ensure it doesn’t get canceled,” Yuann advises.

3. Pay your bill

“Many millennials incorrectly focus on the potential interest rate when shopping for their first card,” says CreditSesame.com’s John Ulzheimer. “This underscores a larger problem, which is that they are thinking about the cost of carrying a balance before they’ve even used their first card.”

Instead Ulzheimer recommends you consider other factors, like potential credit limit. (Aim to spend roughly 10%-20% of your monthly limit in order to optimize your score, which is a bit easier with a higher limit.) “Using the card only to the extent that they can pay off the balance in full each month makes the interest rate irrelevant.”

Still, credit cards are useful in cases of emergency, and sometimes you may find yourself with a revolving balance. That shouldn’t stop you from contributing something to your debt, says LowCards.com’s Bill Hardekopf. “Even if you can’t pay off the entire balance, it is critical to make the payment on time every single month. If not, this will significantly damage your credit score. That is something that will haunt you on future loans,” such as for a car or house.

Need help figuring out which card is right for you? Check out MONEY’s credit card matchmaker tool.

Read next: MONEY’s Best Credit Cards

MONEY credit cards

Not Paying Your Bills on Time Just Became a More Costly Mistake

past due envelopes in mailbox
Alamy

Your credit score could now be affected by your bill payment history.

FICO, creator of some of the most widely used credit scores in the U.S., will reportedly announce a new scoring formula designed to help high-risk consumers access credit, the Wall Street Journal reported Wednesday. The model will incorporate consumers’ payment history on things like utility, cellphone and cable bills, in addition to how often a consumer changes addresses.

Some consumers may have already been affected by the new score, which has yet to be named. FICO says it has been working with 12 credit card issuers, which were not disclosed in the Wall Street Journal report, to test the new score in lending decisions since November. The score is expected to be offered on a national scale by the end of the year, which will give lenders the ability to reliably score an additional 15 million consumers, according to FICO.

This announcement raises many questions about how the score will be used and how it may affect consumers who already have credit scores. FICO did not immediately respond to requests for comment from Credit.com, but here’s what we know so far.

What We Know About the New FICO Score

The score will open up credit access to as many as 53 million consumers who do not have credit scores or credit reports. Such “unscoreable” people generally can’t get credit products and may have trouble securing housing, utilities or a cellphone, because companies outside of the credit industry use credit history to make business decisions. Those credit histories come from the three major credit reporting agencies: Equifax, Experian and TransUnion.

Payment history with cable, cellphone, electric and gas bills generally aren’t reported to credit bureaus and aren’t traditionally used in credit scoring models, but they are the basis for the new FICO score. The payment information comes from an Equifax database of telecommunications and utilities providers. The score will also factor in how often a consumer changes addresses, in addition to other data included in a LexisNexis database that has yet to be described. Frequent address changes suggest instability, according to the Wall Street Journal article.

What We Don’t Know

So far, 10 credit card issuers have used the score, but it’s unclear how many and what kind of creditors will adopt the new FICO score. It may be of interest to many lenders, because it presents the opportunity to grow business and, as a result, make more money.

Consumers have a legal right to access information about them collected by consumer reporting agencies and dispute inaccuracies, but it’s unknown how consumers will be able to do that with the new data. Traditional scores are based on credit reports you can get for free each year. (You can see get your credit scores for free on Credit.com to see how your reports affect your credit standing.)

Perhaps some of the biggest unanswered questions are how many cable, cellphone, electric and gas companies will report this information and whether or not it will impact people who already have scores through traditional models.

For years, experts in the credit scoring industry have talked about the value of adding things like rent payments and utility bills to credit scores as a way of giving more people access to credit, but FICO has mostly stuck to its traditional formulas (rent payments do not seem to be included in this new model). The changes reported by the Wall Street Journal represent a huge shift from FICO, but how much it will impact the credit marketplace remains to be seen.

More from Credit.com

MONEY credit cards

These “Elite” Credit Cards Are Most Likely to Get Hacked

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Getty Images

It turns out that the fanciest cards aren't the safest.

So-called elite credit cards—those pieces of plastic with words like Black, Centurion, and Infinite attached to them—turn out to be the most prone to hacking, according to a recent study by Forter. The fraud-prevention software company looked at hundreds of thousands of credit cards over the course of a year and found that elite cardholders were subject to more than twice as much fraud as consumers with a basic credit card. Fraudsters attacked other products, like gold and platinum cards, less often than elite cards as well.

“Fraudsters operate as a business,” says Forter chief executive Michael Reitblat. “They would like to buy as many expensive items as they can using the stolen cards, but they lack the financial information of the original card holder—mainly how high is the credit limit. A proven way for fraudsters to guess the available credit is by targeting elite cards. Their owners have more money and better credit scores and thus enable the fraudsters to buy more with a single stolen card.”

Keep that in mind the next time you’re overcome with schadenfreude at the sight of someone else’s American Express Centurion Card. Elite cards saw fraud rates of 1.7%, compared with 1.0% for gold, platinum, and loyalty club cards. Basic and corporate cards saw fraud only 0.8% and 0.7% of the time, respectively.

Forter also found that most fraud is committed in the middle of the night (2am – 6am).

Simple steps like tracking purchases made with the card online and contacting your issuer if you see something funny can help you prevent fraud from doing lasting damage to your credit score. You should also get a free credit check from annualcreditreport.com from each of the three credit reporting agencies once a year.

“Owners of elite cards are more likely to miss an unknown charge on their statement and not report it as stolen, which will allow the fraudster to be able to use the card for several transactions over a period of time,” says Reitblat.

Which card is right for you? Find out here.

MONEY credit cards

4 Credit Cards for the Forgetful

These are great cards for people who can't find the time or motivation to focus on monitoring their credit cards.

Do you have better things to worry about than your credit cards? Since most of us do, it’s easy to misplace a monthly statement, lose a card or even forget to make a payment. And when we forget, it would be nice to have a credit card issuer that is ready to forgive you and even help you make it better. Thankfully, there are several credit cards that offer terms to help cardholders who might make a mistake from time to time.

Keep in mind that a late payment can still affect your credit, as it will be listed on your credit report. (You can see how any late payments are affecting your credit scores for free on Credit.com.) However, there are other potential negative impacts that you can avoid if you choose a card that’s more forgiving.

Here are four credit cards for the forgetful.

1. PenFed Promise

This card consistently wins our Best Credit Card in America award for the Simplest Card because it has no fees whatsoever. This means that forgetful cardholders don’t have to worry about paying a late payment fee. And although most other cards will impose a penalty interest rate on those who make a late payment, this card will continue to offer cardholders the standard rate, regardless of their payment history. To receive this card, applicants must be a member of the Pentagon Federal Credit Union, which is open to members of a wide variety of military, government and defense industry workers, as well as members of their family or household. In addition, membership is open to those who belong to a military support group, which anyone can join for a one-time fee of $15. And since there are no fees for this card, that means that there is no annual fee, too.

2. Citi Simplicity

Like the PenFed Promise, the Citi Simplicity features no late fees or penalty interest rate. This card also boasts 18 months of interest-free financing on both new purchases and balance transfers (with a 3% balance transfer fee). Other benefits for the forgetful include automatic account alerts to remind cardholders of their balance levels, payments due or when they go over their credit limit. Account alerts can be received by email or text messages directly on their mobile phone. Cardholders can also choose their own payment due date, so they can pick the time of the month that works for them and is easiest to remember. There is no annual fee for this card.

3. Discover it Miles

The new Discover it Miles card offers several features for forgetful people. Discover will automatically waive a cardholder’s first late payment fee, and there is never any penalty interest rate. And while the standard Discover it card requires cardholders to go online and activate their bonus reward categories each quarter, the Discover it Miles card offers 1.5 miles per dollar spent on all purchases, all the time, with nothing to remember. Additionally, new cardholders receive double the miles they earned during their first year as a cardholder, automatically, so long as their account is open and in good standing.

Discover also offers email and text reminders as well as a mobile app that cardholders can use to notify them of important events such as their statement being available and their payment being due. Finally, Discover also has a great reputation for fast replacement of lost, stolen or damaged credit cards. There is no annual fee for this card.

4. Capital One Quicksilver

Capital One has a streamlined rewards system, which means that cardholders don’t have to remember all sorts of confusing terms and conditions to use the rewards that they have earned. With the Quicksilver card, customers earn 1.5 cents per dollar spent, with no bonus categories to register for or worry about. And as a Visa Signature card, customers have access to 24/7 emergency card replacement and cash disbursement, in case their card is lost, stolen or just forgotten. There is no annual fee for this card.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

More from Credit.com

This article originally appeared on Credit.com.

MONEY credit cards

How Does Amazon’s New 5% Cash Back Card Measure Up?

Amazon Prime
Alamy

Amazon has a new store credit card that offers Amazon Prime members 5% back on qualifying purchases. But how does it compare to the competition?

Amazon and Synchrony Bank released a new credit card offer for Amazon Prime customers last week, offering 5% cash back on qualifying purchases and even promotional financing for orders over $149.

The store credit card is a credit product you may be familiar with at bricks-and-mortar retailers. Often, these cards offer a discount at sign-up, and promises of exclusive discounts or or coupons in the future. With the 5% cash-back offer on all purchases, is the new Prime card a good fit for frequent Amazon shoppers?

How This Card Works

Subscribers to Amazon’s Prime service are eligible to receive 5% cash back on qualifying Amazon.com purchases as a statement credit. Or, they can receive a variety of promotional finance offers. For example, cardholders will pay no interest on charges of $149 or more if the balance is paid in full within six months of purchase. Otherwise, the standard interest rate of 25.99% will apply. In addition, new applicants will receive an Amazon.com gift card loaded into their account instantly upon approval.

This card is offered by Synchrony Bank, and is not affiliated with any payment network, so it is only valid for purchases from Amazon. Applicants must be members of Amazon Prime, which costs $99 per year and includes free two-day shipping and access to their streaming video and music services. There is no annual fee for this card, but cardholders must be current Amazon Prime subscribers to receive the 5% discount or the promotional financing offers.

There are other store cards and credit cards that also allow you to save money on Amazon purchases. Here are a few offers so you can weigh your options.

Amazon.com Rewards Visa Card From Chase

Chase offers this card that earns 3% back for purchases from Amazon.com, 2% back at gas stations, restaurants and drugstores, and 1% back on all other purchases, and is accepted anywhere Visa is. New cardholders also receive a $30 Amazon.com gift card applied to their account at the time of approval. There is no annual fee for this card.

Sallie Mae MasterCard From Barclaycard

This card offers 5% cash back on the first $250 cardholders spend each month on gas and grocery purchases, and the first $750 spent each month on eligible book purchases. Interestingly, Amazon.com is coded as a book store, a legacy of their early origins as just a book retailer. Cardholders earn 1% cash back on all other purchases, and there is no annual fee for this card.

SimplyCash Business Card From American Express

Another strategy for getting discounts from Amazon purchases is to use Amazon gift cards, which can be purchased at some office supply stores. The SimplyCash Business Card from American Express offers 5% cash back for purchases at U.S. office supply stores and on wireless telephone services. It also features 3% cash back on a category of your choice including airlines, hotels, car rentals, gas stations, restaurants, advertising and shipping, and on all other purchases. There is no annual fee for this card.

Blue Cash Preferred Card From American Express

This card offers 6% cash back on up to $6,000 spent each year at U.S. supermarkets, which often sell gift cards for Amazon. In addition, this card offers 3% cash back for purchases from select U.S. department stores, and 1% cash back on all other purchases. There is a $75 annual fee for this card.

Before you apply for any credit card, it can be helpful to check your credit standing so you can target your search to credit cards that fall within your credit range. You can get two of your credit scores for free on Credit.com, and they’re updated every 30 days.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Credit

Woman Is Sent 300 Credit Reports By Accident

overstuffed mailbox
Christie & Cole Studio Inc.—iStock

A woman reportedly requested her free credit report and got 300 strangers' reports instead.

A woman in Maine came home to a funny sight earlier in March when her mailbox was stuffed with more than 300 envelopes, each containing a credit report.

Here’s what’s not so funny: None of them belonged to her.

Katie Manning contacted a local news station (WGME 13 TV in Portland, Maine) after she realized she had all of these strangers’ sensitive information, and the station put her in touch with the state Bureau of Consumer Credit Protection.

Manning had requested her credit report from Equifax earlier in the month, she told WGME, but she received others’ reports instead of hers.

“I’m not supposed to have this information, this is unbelievable, someone has messed up,” Manning told WGME.

Equifax did not immediately respond to requests for comment from Credit.com, though Equifax’s Vice President of Corporate Communications Tim Klein told WGME, “This is a high priority. Obviously this is a serious situation. I’m going to get our security and forensics teams involved.”

William Lund, superintendent for the Maine Bureau of Consumer Credit Protection, told Credit.com the bureau is sending the credit reports to Equifax attorneys so the agency can complete its investigation. Lund said his primary concern is that those affected by the breach — mostly consumers along the East Coast — are notified.

“I’ve been in touch both with in-state attorneys here and out-of-state firms for the company, and they are working hard to figure out what happened and to prevent it from happening again,” Lund said. “They have told me that they have identified the issue and that there is no evidence of an ongoing issue with this particular situation.”

Credit reports contain all the personal information someone would need to steal your identity and commit credit fraud — they include Social Security numbers, names, birth dates, addresses and employers, among various credit data.

Regularly reviewing your credit reports is one of the best ways to find out if you’ve been a victim of fraud (looking at your credit scores is another), which makes this situation a bit ironic, considering how this error could have resulted in a lot of fraud.

Despite the seriousness of what happened, it’s still important to request your free annual credit reports as part of your regular financial practices. In between those checkups, you can use your credit scores as fraud indicators, looking at the same scores periodically to see if there has been a sudden change, which may be a sign of fraud. You can see two of your credit scores for free every 30 days on Credit.com.

More from Credit.com

This article originally appeared on Credit.com.

MONEY cash

You Could Get $1 Million for Busting Software Pirates

CDs labeled in Sharpie marker
Jan Miks—Alamy

If you happen to know a software thief, you could earn some serious money for turning them in.

When you were a kid, you may have heard that nobody likes a tattletale. That isn’t true. BSA The Software Alliance loves tattletales.

If you report software piracy to BSA and your information directly results in a legal settlement between the alliance and the offending party, you can get a significant cut of that settlement. BSA advocates for the software industry, and some of its members include tech giants like Adobe, Apple and Microsoft. It encourages people to report companies using unlicensed versions of software, incentivizing these reports with the possibility of getting thousands of dollars in return.

No Piracy, the BSA initiative to compel reports of unlicensed software use, markets the program as a way for people to get extra cash and even pay off debt. A No Piracy post to Facebook on March 3 reads, “Looking to pay off your credit card debt? If you know a company using unlicensed business software, file a report today to be eligible for a cash reward.” In fact, most of the No Piracy Facebook posts from the past few months appeal to consumers’ need for “extra cash,” whether it be for holiday gifts, a vacation or spending money.

BSA receives about 2,500 reports in the U.S. each year, said Roger Correa, BSA’s director of program coordination for the Americas. Only about 40% of informants request a reward. Last year, BSA awarded about $250,000 total, the smallest award being about $500 and the largest about $22,000.

A report has to meet certain terms and conditions in order to be eligible for a reward. BSA defines piracy as when a company or organization “installs unlicensed software on computers that it owns or leases for its employees to use in their work.”

Because payment is contingent on BSA reaching a settlement with the company, it may take several months to receive a reward, and there’s no guarantee you’ll get anything:

“The decision to pay a reward based on your report and the amount of that award shall be within BSA’s sole discretion. A reward may be payable only if BSA pursues an investigation and, as a direct result of the information provided by you, receives a monetary settlement from the reported organization,” the No Piracy terms and conditions read. Correa said BSA needs to get at least $10,000 in settlement revenue to be able to give a reward, and it takes an average of 6 months from report to payout in the U.S.

“It’s not fast cash,” he said. “These are very thorough investigations.”

While reporting piracy may not be your ticket out of debt, it’s a strategy you can consider if you happen to know about a company using unlicensed software. The online report form says all complainant information is kept confidential.

Should your anti-piracy fight not result in a windfall (the commission is determined on a sliding scale up to $1 million, depending on the settlement amount), you’ll have to figure out how to face your debt somehow. There are many strategies, but the most important thing is to start tackling the debt as soon as possible, avoid adding to it and keep it from growing.

The lifetime cost of debt is staggering, especially if you have bad credit. You can see where your credit scores stand for free on Credit.com.

More from Credit.com

This article originally appeared on Credit.com.

MONEY credit cards

Can You Pay Your Mortgage With a Credit Card?

best travel rewards credit card
Robert Hadfield

Sometimes, lenders allow you to pay one debt with another, but there are a lot of things to know before you charge a mortgage.

You can use a credit card to pay many kinds of bills, and if you have a rewards credit card you pay in full every month, you can use those payments to increase your rewards. It’s a common strategy.

Still, just because you have the ability to pay a bill with your credit card doesn’t mean it’s a safe tactic. Some consumers are tempted to use their credit cards to make mortgage payments, if they have that option, because large transactions generate more rewards, but doing that might actually cost you, rather than save you money.

It’s not very common to have the option to pay your mortgage with a credit card, but if you have the ability to do so, you’ve probably wondered about the risks and rewards of paying a loan with a credit card.

What to Ask Your Lender

If you can use your credit card to pay your mortgage, find out if there are fees associated with the transaction. Credit card transactions can be very expensive to process — it depends on the card you’re using — so the lender may charge you that fee so they don’t have to foot the bill

If there’s a fee, compare that to the rewards you might earn by charging your mortgage payment. Say you’re using a card that offers 1.5% cash back on all purchases — any processing fee exceeding 1.5% means you’re paying to pay your mortgage.

You should also ask how that transaction will be processed. A Reddit user recently posted about paying a mortgage with a credit card, and the payment went through as a cash advance on the card. Cash advances start accruing interest as soon as the transaction clears, which means they can get extremely expensive. Also, cash advances generally carry a higher interest rate than normal credit transactions, hitting you with a double-whammy of higher interest that starts accruing immediately.

Should your lender not charge fees in excess of your rewards, and if it codes the mortgage payment like a regular credit transaction, the strategy could work in your favor.

At the same time, you may set yourself up for some serious financial damage if you miss a payment on the card and have to pay interest on what might end up being a very large balance. You can see how your mortgage is impacting your credit scores for free on Credit.com.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Kids and Money

The Best and Worst Ways to Give Your Teen Credit

When your kid needs access to serious money, what kind of plastic is best for the job?

When your children’s concept of pocket change involves actual change, helping them keep track of their money is pretty easy. But when they start needing serious coin to gas up a sports utility vehicle, or travel abroad, you need more sophisticated financing alternatives like a credit card.

Keith Singer saw the light when his teenage son’s backpack was stolen at school, and he realized there had been $300 in his wallet. “He lost all his money,” says Singer, a wealth manager from Hollywood, Florida.

Here are some options, along with what you need to know before you give your teen access to credit:

Your Credit Card

Pros: Adding your child as an authorized user should take a simple phone call, and the child will have her own card to use. You can usually get a separate accounting of their charges.

Cons: The card will have your credit limits. Plus, no restrictions will be imposed on spending. Also, U.S. cards do not always work in foreign countries. They often have high transaction fees abroad, especially for cash advances.

Parents say: It’s hard to trust a teen with your own credit. Curtis Arnold, editor-in-chief of cardratings.com, added his two oldest children as authorized users on his accounts, but never gave them the cards. “We’ve never felt comfortable handing them a card other than for one-time use,” he says. His top fear: they would lose it.

Bank Account with ATM Card

Pros: It may take an in-person visit to a bank to open up an account for a minor, but then you can link it to a parent’s account to easily transfer funds. The ATM card makes it easy to get cash while traveling and can be used as a credit card. If you do not sign up for overdraft protection, transactions will be denied when funds are not available.

Cons: Beware that fees can rack up if the account does go negative or below a required minimum. Debit cards do not offer all the same consumer fraud protections as credit cards. They may incur overseas transaction or ATM service fees, and they require parental attention to keep adding funds.

Parents say: When one of Elizabeth Powell’s 16-year-old triplets went to England last summer, he opened up an account at his dad’s credit union. Then she transferred in several hundred dollars a month. The teen was able to use the debit card for his needs in British pounds, with minimal fees. “The system worked perfectly,” Powell says.

Keith Singer says one additional benefit for the bank account he opened for his son, who is now 17, is that it encouraged the teen to deposit his summer earnings.

Prepaid Debit Card

Pros: Getting one is easy, and most have slick mobile interfaces. As they are not linked to any bank account or credit line, there are fewer worries about overspending, loss or identity theft. Some cards, like Oink, allow parents to restrict spending in certain categories, like alcohol.

Cons: Some prepaid cards come with lots of hidden fees just to access your own money. They do not help build a credit history.

Parents say: Arnold likes the Bluebird card offered by Wal-Mart and American Express because, he says, “it’s like a credit card on training wheels.”

Most of all, he likes the relative safety of it. His oldest son had a credit card that was compromised while he was a senior in college. “With a prepaid, you don’t run that risk because they could wipe out the account, but not the whole checking account,” Arnold says.

Personal Credit Card

Pros: Building a credit score at 18 is smart. A typical newcomer does not start at zero, but rather at around 600, says Greg Lull, head of consumer insights at Credit Karma. That is in the middle range between the top of 850 and the bottom of 300.

Cons: If your young adult is not ready to handle the responsibility, his credit score will drop, and he will build up debt. Most young adults bottom out at age 21 before turning things around, says Lull.

Parents say: When our kids are ready, we’ll go for it. Arnold says of his third child, who is now 17: “Once he gets through freshman year of college, maybe we’ll do regular debit card, and then as an upper classmen, get a student credit card for him.”

MONEY CFPB

CFPB Says Mandatory Arbitration is Bad for Consumers

two hands pulling $100 bill and ripping it
Mike Kemp—Getty Images

You may have unwittingly ceded your rights to sue your credit card or bank.

Consumers who have serious beefs with their financial institutions can’t get much relief these days, according to a study released today by the Consumer Financial Protection Bureau.

The research looked at mandatory arbitration clauses in contracts for credit cards, prepaid cards, payday loans, checking accounts, private student loans and mobile wireless contracts.

These clauses state that either the company or the consumer can require any dispute over the product or service to be settled through arbitration rather than the courts—and generally allow companies to block class-action lawsuits, which tend to be a more lucrative means of getting redress.

The Bureau found that arbitration clauses were prevalent in the six consumer product markets it looked into. A full 92% of the prepaid cards obtained by the CFPB were subject to arbitration and 53% of the market share of credit card issuers, for example. And while only 8% of checking accounts have these clauses, that percentage represents almost half of insured deposits.

Meanwhile, three quarters of consumers surveyed didn’t know whether any contracts they signed had an arbitration clause, and only 7% understood that they could not sue their credit card issuer if their contract does include such a clause.

Why Mandatory Arbitration is Bad for Consumers

The arbitration practice is generally preferred by financial institutions since it reduces legal expenses.

But the CFPB notes that class-action suits tend to provide greater renumeration than other routes of seeking restitution, and that “larger numbers of consumers are eligible for financial redress through class-action settlements than through arbitration or individual lawsuits.”

In the 1,060 arbitration cases filed with the American Arbitration Association in 2010 and 2011, consumers received less than $400,000 in relief and debt forbearance, compared to the $2.8 million companies received (mostly for disputed debts).

The CFPB also noted that only about 1,200 individual federal lawsuits are filed by consumers per year in the consumer markets studied.

Comparatively, the CFPB found that more than 160 million class-members were eligible for some kind of relief in class actions taken over a five-year period—equating to about 32 million a year. This resulted in $2.7 billion in settlements.

One argument against class-action lawsuits is that litigation leads to higher costs for financial institutions—which could then be passed down to consumers. The CFPB, however, found no evidence to suggesting that arbitration clauses led to lower prices for consumers.

What Happens Next

The study was mandated by the Dodd-Frank Act, and the CFPB has the authority to issue regulations regarding arbitration clauses.

The CFPB says it will be meeting with stakeholders after they have had a chance to read the report, and invites comments regarding its findings.

Consumer advocates have long called for banning mandatory arbitration clauses.

Getting rid of a financial institution’s ability to use them “gives the consumer the ability to decide how they want to decide the case,” says Pew Charitable Trusts’ consumer banking project director Susan Weinstock.

By avoiding arbitration, she says, consumers aren’t subject to the rulings of arbiters who are often selected by the financial institutions, who may not hold law degrees and whose rulings need not be made public.

Even some in the industry are not fans. “Mandatory arbitration has proven to be a thorn in consumers side,” says Adam Levin, chairman and co-founder of Credit.com. “These clauses are biased towards the company.”

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