Consumers Bear the Risk with Gift Cards
The chaotic holiday shopping season is in full swing, but many of us are still scratching our heads about what to get for some of the loved ones on our “nice” list. Sometimes it's hard to think of something heartfelt for the person who has everything or who has tastes completely opposite your own. In those situations, a gift card might be a great solution — you know what they like but don't know what they want, need, or already own.
There are many situations where a gift card makes sense. The following examples come to mind:
- A couple has a wedding registry at Target, and you want to let them pick out items they didn't receive after the wedding. This is particularly great if the couple will be moving — they can use their cards after the move.
- The gift you want to give is online in nature, such as music or e-book downloads. It's easier to give my young niece a gift card so that she can download books directly to her Nook, rather than handing her cash.
- You know it's your gift recipient's favorite store, and there is zero doubt that he or she would spend the money there, and then some, in the near future.
Even though there are some good reasons to consider them, it's important to understand that when it comes to retailer gift cards, the consumer bears the risk.
Fewer consumer protections
Gift card transaction volumes are expected to hit a $100 billion high in the U.S. market in 2011, according to TowerGroup's Gift Cards: Coming of Age in a World of Chaos report. TowerGroup found that through 2008, expired cards accounted for 52% of value loss; fees caused approximately 39% of loss, and lost gift cards accounted for 9% of total lost value. Thanks to Title IV of the Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, those figures have improved, eliminating most fees, but consumer protections still fall short in the following ways:
- Gift cards are anonymous in nature and offer no protections for lost or stolen cards. (Tip: When giving gift cards, include a copy of the receipt. Some card issuers will replace a lost or stolen card.)
- Consumers aren't as fully protected in disputes and billing accountability as they are with debit cards or even credit cards.
- Consumers risk total loss of value should a retailer file bankruptcy. (As J.D. once said, “If you own a gift card to a bankrupt company, you're basically a tiny creditor,” and you're last in line to get repaid.)
In addition, although the CARD Act and eliminated or extended expiration dates, some cards still expire, which means another risk of total loss of value — you might as well hand Best Buy $50 just for the heck of it.
Cards go unused
Gift cards are setup in such a way that the consumer loses if the card is lost, stolen, or expires. The money was spent up front, so the consumer bears all of the risk. But those aren't the only ways retailers can profit.
A Consumer Reports poll found that even though 46% of consumers bought gift cards and 15% had them on their own wish lists, one in four hadn't redeemed all of their gift cards almost one year after receiving them. Of those who had unused gift cards, 41% of respondents said they hadn't used the card because they hadn't found anything they wanted and 37 percent said they hadn't had time to use their cards. (I've had unused cards simply because I kept forgetting I had them. One that I received for Home Depot went unused for more than a year!)
Gift cards encourage more spending
Then there's the prepaid amount to consider. A recipient can either leave money on the card or pay more money to redeem the full value (a win for the retailer). I remember one occasion when I went into a store to redeem a $30 gift card. I found a pair of jeans on the sale rack, and reasoned that it was a “good buy” because they were on sale and I had a $30 card. It might have been a better deal than buying at retail price, but I wouldn't have spent anything at all if I hadn't been wandering the store looking for something to buy with my gift card.
It's rare that a purchase total will equal the exact amount of the gift card. The Consumer Reports poll found that 65% percent of adults who received a gift card spent more than the value of the card. Even if it's $5 more than the card's value, multiply it by how many cards are issued, especially for a big-box stores like Target and Best Buy, and it's serious profit.
If you're considering gift cards for friends and family members, choose wisely. Pick a card you know they'll use because they already shop there frequently, or pick a bank-issued card that's valid anywhere, and check the expiration date and any other rules and regulations.
And if you receive gift cards you know you'll never use, don't let them go to waste. Consider one of two ways to put them to good use:
- Sell or trade them on a site like Card Avenue, Swapagift.com, or CardCash. You'll have to pay a fee and/or sell them at a discount off the value, but it's better than letting them collect dust in the bottom of a junk drawer. You also can try sites like Craigslist or Gift Card Cove which don't have transaction fees, but do come with higher risk because transactions are peer-to-peer.
- Donate unwanted cards to charity. Many nonprofit and charitable organizations accept gift card donations. You also can donate through Plastic Jungle, which gives you the option of giving the full value of your card to needy schools through DonorsChoose.org.
Are you planning to buy gift cards this year? Do you like receiving them as gifts?