Gift Card Pros and Cons

Avoiding gift-card gotchas

Gift cards continue to be among the most popular gift items on the market, and their popularity continues to grow at staggering rates. But not everyone is convinced of their greatness. We found several critical reviews, with some deeming them as downright evil. That's because some gift cards have hidden fees making them worth a lot less than their face value.

In order to learn the whole story behind gift cards, we turned to the Montgomery County Office of Consumer Protection, in Maryland, which publishes an annual gift-card report that lists recommended and not recommended gift cards based on their terms and conditions. Bankrate.com also publishes an annual gift-card study that we found useful in distinguishing the good cards from the not-so-good. Editors of Consumer Reports do not rate gift cards, but do compare the terms and conditions of a few and point out some of the most questionable policies, while Consumers Union, the publisher of Consumer Reports, publishes a summary of key features of gift-card consumer protection laws, state by state.

Consumer Reports is especially critical of gift cards in their 2007 report on the topic. The report covers the "pitfalls" of gift cards, namely fees and expiration dates, and lists tips for avoiding them. Consumer Reports' editors also quote studies showing that these fees and expiration dates are among the top causes of frustration for consumers. Some in the industry, however, believe that the report is too critical and doesn't tell the whole story.

Incentive magazine reports that "representatives from both bank- and retailer-issued gift card groups felt the report simplified some of the issues and overlooked positive experiences consumers have with the cards." The article cites a survey which found that more than 93 percent of consumers are satisfied with branded gift cards. Consumer Reports also admits that despite the pitfalls, gift cards remain popular.

They are not, however, without their drawbacks. Some of them are laden with fees and expiration dates. The iCard Visa Gift Card, for example, charges a $25 maintenance fee every six months, which can quickly eat up the balance of any card. The GiftCards.com Visa Debit Gift Card charges a 35-cent transaction fee for every purchase and a maintenance fee of $2.50 per month beginning six months after the issue date.

Fraudulent use of gift cards is frequent as well. Criminals use stolen credit cards, debit cards and checks to purchase large amounts of gift cards in order to sell them online for cash or redeem them for big ticket items at retailers. A Florida crime ring was busted in 2007 after it had used stolen credit- card numbers to buy more than $8 million in merchandise with fraudulently purchased gift cards.

An additional concern for customers is retailer bankruptcy. According to experts, when a store files for bankruptcy their gift cards often become null and void. The Sharper Image is an example of this. When the store filed for chapter 11 bankruptcy in February 2008, customers were told that their gift cards were unredeemable. In March, the company began accepting cards again, but with stipulations. The balance had to be used in full in a single shopping trip and customers had to spend at least double the value of the card in that transaction. As of June 1, 2008 all Sharper Image stores have closed, leaving remaining gift cards worthless. Both Kiplinger's and Money magazines warn in recent articles that other stores, including Circuit City, Toys "R" Us, Blockbuster and Petco, show signs of financial trouble as well.

Experts say that customers should only purchase gift cards from a well-established store, read the fine print before purchasing and use the card quickly once it has been received.

Despite all this, it's safe to say that gift cards will not be going away anytime soon. In fact, according to researchers, sales continue to rise yearly. It's not hard to see why gift cards are so popular. Daniel Gross, who writes for Slate magazine, says that their appeal is obvious in that they "save time and mental energy and they seem more thoughtful than cash." Gift cards also spare recipients from unwanted gifts, he says.