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Personal finance expert Liz Pulliam Weston

The Basics

Gift cards are the new fruitcake

Research indicates more people are avoiding these bad holiday deals. But if you buy or receive a gift card this year, at least keep these 5 tips in mind to protect yourself.

By Liz Pulliam Weston
MSN Money

It's the time of year when we like to focus on the good news, and mine is this: Gift cards are on the wane.

A new TowerGroup report predicts gift card purchases will drop to $87 billion this year, from $91 billion in 2008. Spending on store-branded gift cards is expected to fall 7%, while spending on general-purpose cards likely will rise a mere 3%.

TowerGroup's predictions, plus a Consumer Reports poll showing only 15% of adults want gift cards and 25% hadn't used a card from last year, led MediaPost's Marketing Daily to label gift cards as the new fruitcake.

Video: Fed proposes new gift card rules

We can blame the economy, rather than a sudden mass realization that gift cards aren't real gifts, for plasticized cash's diminished popularity. But people also might be getting wise to gift cards' many drawbacks, including:

  • The possibility of total loss. Any store-branded card can become worthless if the retailer goes out of business. An estimated $100 million in card value vanished with the 2008 bankruptcies of Sharper Image, Linens 'n Things and other retailers, TowerGroup said.
  • The probability of waste. The amount lost to bankruptcies pales next to the amount that will never be redeemed. A whopping $5 billion of the money spent on gift cards this year won't get used, TowerGroup estimated. This is a big reason retailers and banks push gift cards with such enthusiasm -- that and the fact that most people who do redeem their cards (65%, according to the Consumer Reports poll) wind up spending more than the cards' value.
  • Fees, fees and more fees. General-purpose cards -- gift cards issued by credit card companies -- typically cost $2 to $4 to purchase and then involve additional charges (typically $2.50 a month) after 12 months of inactivity. You might face fees for shipping, checking a balance or replacing a defective or lost card.
  • Expiration dates. This is more of a problem for cards issued by smaller retailers, since major retailers tend not to impose expiration dates and the "valid through" dates on general-purpose cards refer only to the expected life of the magnetic strip, not the expiration of any balances on the card, according to a Bankrate.com survey. Several states ban or limit expiration dates, but in other states cards can expire in as little as six months. In most states, cards can still lose all value because of inactivity and maintenance fees.
  • Limits on use. CVS gift cards, for example, can't be used online. American Airlines gift cards can be used only online or when you're making phone reservations. They're not valid at airport ticket counters or when you're booking through travel agents.
  • The last few dollars might get trapped on the card. Some retailers won't let you use a card unless the remaining balance is enough to cover your entire purchase. They won't let you split a purchase between the card and some other form of payment.

Some new consumer protections will go into effect next summer, thanks to the credit card reform law and the Federal Reserve. Those protections -- still undergoing some tinkering -- include rules prohibiting gift cards from expiring for at least five years after purchase and prohibiting card sellers from charging service or inactivity fees in the first year. All fees must be disclosed, and no more than one fee can be charged per month.

But there's still no protection for consumers who have cards from retailers that go bankrupt or who have the trapped-value problem.

If you get a card this season or plan to give one, the Consumer Federation of America offers these tips:

  • Keep a record of the card's information. I recommend making a copy of the front and back of each card and keeping the information in a secure place. Not all issuers will replace a lost, stolen or damaged card, but some will. Include the issuer's toll-free number if it's not already printed on the card.
  • Spend it fast. Your best bet is to use the cards as soon as possible. Add any expiration dates to your calendar so you don't forget to use a card.
  • Keep track of your balances. The Consumer Federation recommends buying cards only from issuers that allow you to check your balances online or by phone (some allow you to check only when you're at a store).
  • Use your card at a store that allows split payments. Large chains typically let you split your payment between a gift card and another payment method (cash, check, credit card, debit card). Ask first if you're in doubt.
  • Know whom to call. If you have a problem with a gift card, first contact the issuer for help. If you're not satisfied, you can report problems to the Federal Trade Commission at 1-877-FTC-HELP (877-382-4357), your state attorney general's office or the Office of the Comptroller of the Currency's Consumer Assistance Group at 1-800-613-6743 or customer.assistance@occ.treas.gov.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.

Published Dec. 4, 2009

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