80% of Americans Will Purchase a Gift Card this Holiday Season; Know the Risks

A record number of gift card purchases are expected this holiday season according to an NRF survey conducted by BIGresearch which estimates 80.2% of American’s will purchase at least one gift card[i].

The research also indicates that holiday shoppers will spend average of $155.43 on gift cards, a 6.7% rise from $145.61 last year. If these numbers hold true, total spending on gift cards this holiday season will reach $27.8 billion dollars, a 12% increase over the $24.78 billion spent in 2010.

Unfortunately, the convenience of giving gift cards isn’t reflected in the actual use of the cards.

Why gift cards can be risky

Studies show that consumers lose billions of dollars from gift cards each year as cards are forgotten, misplaced, portions are taken as user fees, or the stores behind the cards go bankrupt.

Last year, (2010) the financial services research firm, The Tower Group, estimated consumers lost about $2.5 billion from gift cards. This loss stems from a number of issues:

  • According to a Consumer Reports poll, 27% of people who received gift cards last holiday season have yet to use them (Oct. 2011 data). Respondents were most likely to say this was because they did not have time (51%) or because they forgot about the gift card (41%)sub>[ii]. Lost or damaged cards are also responsible for a slice of the money lost from unused cards.
  • In spite of the 2010 Credit CARD Act that put stiffer laws into effect in August of 2010 intended to protect consumers from high usage fees, short expiration dates, and other practices. However, gift card issuers can still charge hefty fees to buy the cards (expect a fee ranging from $3-7 dollars per card).
  • Card issuers may also charge a fee for every month of inactivity; Visa gift cards for example lose $2.50 a month after 12 months of inactivity[iii].
  • Another loophole not covered in the Credit Card Act is that card issuers do not have to reimburse the value of the cards if they go bankrupt[iv]. To make matters worse, stores do not have to inform you that they have filed for bankruptcy when selling their gift cards – allowing them to collect substantial sums they will never have to repay and even after a company has gone bankrupt, gift card resale sites may still be selling cards to unsuspecting consumers[v].
  • Thieves may have tampered with the gift card before you even purchased it. Using a handheld scanner, thieves read the card’s code, and, when combined with the information on the front of the card, it gives the thieves all they need to redeem the card before you do. On cards without a fixed value they simply call the 800 number to see if it has been loaded with a dollar amount, and if so for how much.  Consumer reports recommends that to reduce the chances that thieves will drain the card, don’t use gift cards hanging on a rack, ask for one that is behind the counter, and if the card is preloaded,  ask the cashier to scan the card to see that the value is intact[vi].
  •  designed to make redeeming the full value of gift cards difficult or impossible.

When giving a gift card, think safety

The Consumers Union has lobbied petitioned the Federal Trade Commission on behalf of consumers asking the commission to go further in their protection of consumers holding gift cards particularly when companies are facing bankruptcy so that funds are set aside to cover the value of these cards. They also recommend that the FTC establish a registry of businesses who have filed for bankruptcy so that consumers have an easier way to gauge the risk of a gift-card purchase. Until these proposals become law, you still have to largely take your own precautions:

  1. Consumer reports says you can reduce the chances that thieves have compromised a gift card, by following a couple of simple steps: 1) don’t use gift cards hanging on a rack, ask for one that is behind the counter, and 2) if the card is preloaded, ask the cashier to scan the card to see that the value is still intact[vii].
  2. If purchasing gift cards online, always look at the site’s refund policy and keep your receipts in case of trouble and you need documentation.
  3. Check the solvency of the card issuer; this is particularly important for restaurants and smaller businesses, but bankruptcies have hit companies of all sizes.
  4. Look for the gotcha’s – excessive fees, penalties for not using the card within a specified time period, etc.

Not all gift cards are equal if you try turning gift cards into cash

There are now several websites like Plasticjungle, Giftcardrescue, and Cardpool that allow you to exchange your gift cards for cash for a percentage of their value – they also resell these cards at a discount.  What you’ll find however is that just because the dollar amounts on gift cards are equal, doesn’t mean the cards have equal value. These websites usually pay more for cards from huge chains like Home Depot or Wal-Mart where there is a large consumer interest in the resold cards, and less for cards from more niche businesses.  Because the value of a card can vary, be sure to look at several card exchange sites to get the best deal; you may get 95% of the card’s value, or you may only be offered 50%.

At the end of the day, a nice holiday card with cash inside is a far safer form of giving.

Linda


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