National Consumers League

Personal Finance

NCL Personal Finance Issues

The real price of gift cards

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gift cards

Sales of gift cards are expected to approach $100 billion in the United States this gift-giving season. Gift cards are a flexible, convenient gift option, but consumers often fail to take into account the hidden prices paid for the convenience. From expiration dates, to maintenance and inactivity fees, to card replacement fees, the cost of using a gift card can quickly add up. Our new tips will help you choose your gift cards wisely and avoid losing money on these cards. And the gift card industry could ease the burden on consumers by adhering to A Gift Card Holder's Bill of Rights.

Types of gift cards

Gift cards typically fall into two categories:

“Closed-loop” cards – These cards are generally sold by retailers and are branded with the retailer’s logo. They can only be used to buy merchandise or services from the retailer who sold the card. Consumers purchase these cards for the face value of the card. They tend to have few or no fees or expiration dates since the retailer makes their profit not from the sale of the cards, but on the markup they charge on the merchandise or service sold.

“Open-loop” cards – Also known as “network branded prepaid cards,” these cards are typically sold by credit card companies, malls, and banks and can be used at any merchant location where the card is accepted. All of the major credit card companies (American Express, Discover, Mastercard, and Visa) sell these cards directly. Banks and other third-party vendors also sell “closed-loop” that work on the credit card companies’ networks. Card issuers profit from the sale of closed-loop cards in several ways. First, an up-front fee on top of the value of the card is typically charged at the point of sale, which higher denomination cards charging a correspondingly higher fee. Second, these cards also tend to have more post-sale fees, in the form of maintenance, dormancy, or inactivity fees that get charged after a given amount of time (typically 6-12 months). Finally, card issuers profit whenever the cards at swiped via transaction fees that merchants pay to accept the cards at their businesses.

The Bottom Line: “Closed-loop” cards offer less flexibility but are generally less expensive to buy and use. “Open-loop” cards can be used in many more places, but consumers pay for the convenience in add-on fees.

Understanding common gift card terms and fees

Balance Inquiry Fees
Consumers unsure of the value of their cards may be able to check that balance by calling a toll-free number (generally printed on the back of the card or its packaging. Some card issuers charge a fee for these inquiries, typically ranging from 50¢-$1.00 per call; though some card issuers allow a few free inquiries per month.

Card Replacement Fees
Many retailers will replace lost or stolen gift cards free of charge with proof of purchase. Issuers of “open-loop” cards typically charge a fee to replace lost or stolen gift cards. These fees may vary considerably from as low as $5.00 to as much as $15.00. Many card issuers charge an additional fee to issue a check for the lost card’s value or to transfer the balance of the card to a new card.

Expiration Date
Many cards must be used within a specified period of time, generally between 1 and 3 years after purchase. Some cards expire as little as six months after purchase. A card’s expiration date (if one applies) is generally printed on the card or its packaging.

Maintenance Fees
Also known as “inactivity,” “dormancy,” or “administrative,” fees these charges deduct funds, generally on a monthly basis from the value of the card. These fees typically begin to be accrued 6-12 months after date of purchase and typically vary from $1.50 to $2.95 per month. These fees continue to be charged until the value of the card is depleted.

Purchase/Processing Charge
Also known as an “activation fee,” this is the cost of buying the card. Most prevalent on “open loop” cards issued by banks, credit card companies, and malls this fee generally increases with the cost of the card. A survey by the Montgomery County (Maryland) Office of Consumer Protection found that such fees can range from as little as $2.00 to $9.00, depending on the type of card and how it is purchased (in person, online, or over the phone).

Transaction Fee
While uncommon, some gift cards charge a fee every time the card is used. The Montgomery County Office of Consumer Protection’s 2007 survey noted transaction fees ranging from 35¢ to $2.50 on some cards.

Shipping Fee
Gift cards purchased online or over the phone may charge a shipping fee.

The bottom line: consumers should comparison shop for cards with the lowest possible fees. Always read the terms and conditions on the card itself, its packaging, in-store displays, and online before purchasing a gift card.

Tips for buying and giving gift cards

  • Encourage the recipients of gift cards to use them quickly to avoid losing the value of the cards to fees.
  • Ask for a gift receipt for each card purchased and include the receipt when giving a gift card. This will allow the card holder to replace the card if it is lost or stolen.
  • Read all terms and conditions prior to purchasing a card. If the terms are not disclosed or if they are too difficult to understand, consider purchasing a different card.
  • Be wary of gift cards sold on online auction sites. These cards are often stolen or counterfeit.
  • Keep all gift cards and receipts in a safe, easily accessible place to avoid loss and neglect of gift cards.
  • If a card requires registration prior to use, be sure to do so soon after receiving the card.
  • If a card’s value is too low to cover an entire purchase, a merchant may be able to do a “split-tender” transaction that will allow part of a purchase to be paid with the gift card and the balance to be paid by another means (cash, check, credit/debit card). If an employee seems unsure how to conduct a “split-tender” transaction, ask a manager to help.
  • Be aware of state laws pertaining to gift cards. These may affect expiration dates, fees, and card replacement.
  • Don’t throw away depleted cards. Some merchants require a card for returns.

Places to learn more

Montgomery County Office of Consumer Protection
“Gift Cards 2007: Best and worst retail cards; A deeper view of bank cards doesn’t improve their look.”

Network Branded Prepaid Card Association
"Tips for Redeeming Gift Cards with the American Express, Discover, MasterCard or Visa Brand Mark"

National Retail Federation
"NRF's Top Tips for Buying Gift Cards"

Consumers Union
"State Gift Card Consumer Protection Laws"