The Gift That Keeps on Taking

Posted by Mike Smith :: July 12, 2007 @ 7:30 am

When it comes to giving gifts, they say that it’s the thought that counts. If your thoughts turn to giving a gift card, you may want to think twice.

Gift cards tend to come in two varieties: store cards for use at a specific retailer and cards that can be used like a debit card almost anywhere that credit cards are accepted.

Store cards have the obvious limitation that they can only be used at one particular retailer. If the gift giver doesn’t know the recipient as well as he thought, the gift might go unused. It’s also possible that the card will be misplaced or simply forgotten about. Some people may even throw their card away when the balance gets down below a certain amount.

Retailers are aware of all of these problems, and have found gift card sales to be a new source of profit. According to published reports citing data from the consulting firm TowerGroup, 10 percent of gift card sales last year were expected to go unused.

While the second type of cards, often marketed as prepaid debit cards, can be used nearly everywhere, they too have their problems. The first downside of these cards is that the gift giver is usually charged a fee for the privilege of giving the card. While these fees vary, $5 seems to be fairly common. This fee usually comes under the name “convenience fee” if you buy the card from a bank, or it is added to the shipping and handling fees if you buy online.

Additional fees are likely with this second type of card, the most common of which is a maintenance fee that is charged every month that the card is not used. You can imagine how quickly a card with a low balance will be drained down to nothing if you don’t use it. The companies that issue these cards have found many creative ways to charge still more fees for tasks such as adding funds, cashing out a balance, or replacing a lost or stolen card.

Finally, it is also possible that either type of gift card will have an expiration date. Some states have started to outlaw the practice of expiration dates, in an effort to protect consumers. Similarly, limits have been set on the types and amount of fees that can be applied. In order to understand the specific rules that will apply to you, carefully read the terms and conditions before purchasing any gift card.

While this information about gift cards may not dissuade you from using them, we here at Lending Club feel that only educated consumers can make informed decisions about how to spend their money.