Financial Tips and Tricks: Gift Cards

Gift Cards - Why They Suck
by FiGuy

OK, so the title is a little strong, but would I get your attention with "Gift Cards - Pros and Cons"? Gift cards can be a nice way to give, but they do have many negatives. You should examine your situation to decide if the negatives outweigh the positives, and you might just be surprised at the answer you come up with.

Lets look at the plus side first.

Gift cards are convenient. They can be purchased just about anywhere these days, and with the credit card branded variety, the recipient isn't bound to just one place to shop. You may even be able to use them online, as many merchants are trying to do anything to get a little extra business. Some retailers still won't take anything but a very established standard credit card, but the number of those who are more flexible is growing.

Gift cards can add a little security. If you are sending gifts through the mail, and a theft occurs, a gift card may be able to be replaced (this varies from card to card, read the details before you purchase), whereas cash that is stolen is gone for good.

The restrictiveness of a store branded gift card, which can only be used at the retailer it was purchased from, can be a positive factor. If you don't want a teenage recipient running out to get a ring through their nose or a nifty new tattoo, their being stuck shopping at a certain store has advantages.

Sometimes the cards are offered at a discount, so you pay less than the card amount and can get more bang for your dollar. There is a reason the retailers can afford to do this, and we'll get to that shortly.

Now for the downside.

For smaller children, and some of us fully grown children, a gift card just doesn't have the same emotional impact as that special toy. If you want to watch your grandchildren bounce off the walls with excitement, a gift card is unlikely to do the trick. Someone with their heart set on getting that robotic hamster just isn't going to react the same way to a gift card, even though it might buy them five of the silly things. It isn't logical, but you aren't giving gifts to Spock, are you?

Gift cards are restrictive. Store branded cards are only good at that store, so if the latest fashion or trendy item isn't available at that store, the card bearer isn't going to get it. Even the credit card variety, which can be used wherever credit or debit cards are accepted, has its limitations. Many online retailers won't accept debit cards, only established credit cards, and may not recognize the gift card as valid. There are still businesses that do only cash business. You won't be getting a cart vended pretzel or banana on a stick while you are shopping with a gift card, for example.

There may be fees. Most retailer branded cards don't do this, but there are exceptions. The credit card branded cards can get hit by this the worst. Debit fees and transaction fees can eat away at the value of the card, and the recipient won't get the full benefit of your purchase. If you want the person you are giving a gift to have $20, they may not get the whole $20 after fees have been applied to their purchases.

Gift cards aren't as safe as many advertisers might like you to believe. If there is no security method in place, like a PIN number, once the card is being used, it can be stolen just as easily as cash. It may look like a credit card, but undoing unauthorized purchases mostly doesn't work like a credit card.

The worst factor by far is that even without fees or additional charges, it may be hard to use the whole value of the card. Remember I said the retailers had a reason they could offer the cards at a discount? This is why. Every penny of value you don't use is pure profit for them. While many states have laws that help protect the consumer, many still do not. There are some new rules at the Federal level, but they don't go into effect until 2010, and mostly apply to the credit card branded general purpose cards. A card may expire before the whole value is used up. If the card isn't used in a timely manner, monthly "dormancy" fees may be applied, and quickly drain the value of the card. The store may make it difficult to split a payment across cards, or between a card and cash, so it may not be easy to purchase something that cost more than the remaining value on the gift card. A recent study by the Consumer Federation of America showed that 17% of gift card recipients had trouble using the whole balance on their card because the store wouldn't allow split payments for purchases greater than the value on the card.

The numbers bear out this last negative factor, even in places that have rules protecting the consumer. Every year X dollars are spent on gift cards (this year estimated to be in the 40-50 billion dollar range), and quite a bit less than X dollars are ever redeemed. The difference represents lost value. Now, whomever you may be giving a card to may be a smart and responsible consumer who will use the card in a timely manner, and make sure they get every penny out of it, but the numbers say many, if not most, people do not.

That sucks.

To quote Dilbert: "You are buying something that works like cash, only not as well".

Some of the card vendors are addressing these problems, and laws are also being passed to further protect consumers, so the situation may not be quite as bleak as I'm telling you, but there is still a lot of room for improvement.

Take a look at your specific situation, and carefully read the terms and restrictions of the card you are considering, before you make that purchase. If you will be mailing the gift, if you can buy the card at a decent discount off face value, if the card you are looking at makes a point of addressing some or most of these common problems, or you are happy about some of the imposed restrictions because of your circumstances, a gift card may well be the best way to go. Otherwise cash is probably your best option.