What’s the Real Cost of a Gift Card?

Is a loved one’s birthday coming up, but you have no idea what to give? You may be tempted to buy a little piece of plastic instead of a tie, jewelry, or some other “risky” item. As you probably know, gift cards are debit cards with a prepaid balance. While they can be an easy way to make someone happy without having to guess taste or need, be aware that you could be paying a premium for the convenience if you don’t shop around first.

What They Are

There are two basic varieties of gift cards:

• Store gift cards, which can only be used at a particular retail establishment.
• “General-purpose” gift cards sporting the American Express, Visa, or MasterCard logo, which can be used virtually anywhere.

For both, all you have to do is load them up with the cash value of your choice and they are good to go. Many come with pretty pictures (images of holidays and birthday scenes, for example) and attractive packaging too.

So which type should you buy? If you want to make the most of your money, give a store card, since they tend to have no or very low fees. However, if want the recipient to have maximum shopping flexibility, go for the general-purpose gift card. While they tend to be fee-heavy (which can erode the value of your giving dollars), the shopper isn’t limited to one specific store.

The Advantages

Of course if you are simply stumped over what to get someone, any gift card may be better than a random selection. They are easier to use than paper gift certificates, safer than cash, and more festive than a check. Just figure out how much you want to spend and choose a store or financial institution. All the recipient has to do is shop. In the case of the general-purpose card, the “giftee” can even take out cash at an ATM.

Another benefit is that they can be used as an effective tool to introduce the concept of credit to children and young adults. Since gift cards look and act much like credit cards, if you give one to a minor they will begin to become accustomed to using plastic. There will be no bill to pay at the end of the month, but there is a limit on how much they will be able to spend, so they can learn to be savvy consumers early.

One last advantage is that thanks to the Credit CARD Act of 2009, the balance on a gift card cannot expire for at least five years from the date of purchase or last reload.

The Drawbacks

Both types of gift cards come with a few downsides but because general-purpose cards have more advantages, they also can come with more extensive fees. Be sure to weigh the costs and compare products before you buy one. The terms will be apparent on the application.  Fees can include but are not limited to:

• Purchase fees. When you purchase the card, you could pay a fee based on the denomination. The lower the dollar figure, the more expensive, ratio-wise, the fee becomes.
• Activation or closing fees. If the recipient wants to activate or close the card out for the remaining stored value, he or she may be charged an “activation or closure fee” to do so.
• Dormancy or inactivity fees. According to the gift card provisions of the Credit CARD Act of 2009, if there is a period of inactivity of at least one year, institutions could charge a monthly "service fee" to keep the card active.
• Reload fees. Want to add more money to your card?  Watch out for the balance reloading fee.
• Card replacement fees. Lost or stolen cards may be replaced with a new card for the remaining balance for a "reissue fees", so it may not be worth the effort if the remaining value is small.
• Shipping fees. Like most products ordered online, gift cards could also have a shipping charge depending on the amount purchased.

Other Miscellaneous Fees

While many of the “General Purpose” cards do allow ATM access, the transaction fees can be steep. And if the card is used at an ATM not owned by the issuing financial institution, even more charges will be deducted. Service fees are another consideration. Want to speak to a customer service agent? There could be a fee for that too!

Gift cards can indeed be a great present. But before you buy, shop around for a card with the least amount of fees and restrictions. That way your dollars will stretch the furthest and your loved one will reap the most from your generosity.

BALANCE