The Gift Card Trap
A CardWeb.com online poll showed that 50% of its users planned to purchase one or more gift cards for friends and family during the 2004 holiday season. Aggressive marketing by credit card issuers and retail stores fueled the massive rise in gift card popularity over the past few years.
What are gift cards?
Prepaid gift cards are essentially fancy plastic gift certificates. Gift cards enable their recipients to purchase the items of their choice using the card’s stored balance. However, unlike gift certificates which are issued in fixed denominations, prepaid gift cards can be loaded with any dollar amount. Gift cards are good for holidays, birthdays, and other celebrations.
Who issues gift cards?
Both retailers and credit card companies issue gift cards. Retail gift card recipients may only redeem their card balance at the issuing store, whereas credit-card-issued gift cards may be used virtually everywhere that credit card is accepted. For example, a Barnes & Noble gift card may only be used at Barnes & Noble stores, whereas a VISA gift card can be used anywhere VISA cards are accepted.
Beware of hidden gift card fees and surcharges
Gift cards may solve the dilemma of finding presents for hard-to-shop-for friends & family members and appear more thoughtful than giving cold hard cash. But beware of the strings attached.
Like virtually every product in the financial industry, the devil is in the details. Many retail & credit network gift cards are laden with numerous fees and surcharges. Here are some of the most common fees gift card givers and recipients should be aware of:
- Card activation fee. The card activation fee is paid by the purchaser of the gift card. The purchaser must pay the value of the gift card, plus a small service fee. This activation service charge ostensibly covers the cost of issuing the card, and is usually $1 to $5, or a percentage of the balance loaded. Watch out for cards with high purchase fees.
- Surcharges. This fee is deducted from the card balance each time the card is used to purchase goods. You can minimize the impact of a surcharge by spending the entire balance in one purchase. Otherwise, a potentially large chunk of your balance will be consumed by per-purchase fees.
- Dormancy fees. Many gift cards charge a periodic “account maintenance fee,” which slowly erodes the value of the card. The gift card issuer deducts a fee from the card balance, typically each month. Usually, but not always, the account maintenance fee only applies during months that the card is not used. While dormancy fees may encourage cardholders to take advantage of their gift cards immediately, the end result is that the issuer gets to pocket the money. Avoiding cards with dormancy fees may be impossible; look for cards that begin to charge dormancy fees for at least twelve months.
- Expiration dates. The expiration date is the grand-daddy of dormancy fees. After a set period of time, the card expires and the entire balance is lost.
As you can see, gift card issuers often levy numerous fees to prevent recipients from utilizing the full value of the card. These fees are unjustified and should not exist, particularly for retail gift cards. After all, a gift card is guaranteed income for the issuer. If the gift card is used, the issuer makes money. If the gift card is never used – a common occurrence – the issuer pockets the entire untouched balance as pure profit! Why should you have to pay extra to guarantee them business? If anything, gift cards should sell at a discount.
Caveat Emptor
If you are considering a buying a gift card, or are the lucky recipient of one, make sure you read the fine print to understand what fees and restrictions apply. In light of the fees, gift card purchasers may want to consider sticking to cash gifts. The last thing you want is for the recipient of your gift to feel shortchanged!
As always, shop around to get the best gift card terms. Although we don’t have a specific gift card to recommend, the American Express gift card appears to be a relatively good deal.
