Personal Finance: 'Tis the Season for holiday gift cards

Personal Finance: 'Tis the Season for holiday gift cards

December 4th, 2013 Chris Hopkins in Business Diary

Chris Hopkins

Photo by Patrick Smith/Times Free Press.

Once considered a Christmas present cop-out, gift cards have attained mainstream status as a holiday present. According to the National Retail Federation, 80 percent of shoppers will purchase gift cards this season, spending nearly $30 billion. And more than six in 10 people surveyed say they want to receive them. Market research firm Tower Group estimates total gift card sales of $120 billion for all of 2013. Meanwhile, some $2 billion worth will languish unused in a drawer this year alone.

With all that magnetic moolah swirling around, a few tips for buyers and recipients may be in order.

Caveats for gifters. Gift cards are generally divided into two basic classes. So-called closed loop cards are issued by individual merchants like Starbucks, Barnes and Noble, or Kohl's, and are generally redeemable only at that particular store. Most of these cards do not expire, and typically impose no additional fees (with very few exceptions).

Open loop cards are issued by banks and credit card companies, and bear the logo of the issuing institution (Visa, MasterCard, AMEX, etc.) As of this writing, there are seven different open loop cards, most of which charge purchase fees ranging from $3.95 to $6.95.

The CARD act, passed by Congress in 2009, limits charges and fees on debit and gift cards and has reduced the incidence of fee abuse. However, five of the seven general purpose cards assess maintenance or dormancy charges of $2.50 to $3.00 per month after 12 months of inactivity. Three of these cards are subject to expiration after the 5 year minimum period mandated by the CARD act. And 2 of the issuers charge a whopping $15 replacement fee if a card is lost or stolen. While this type of general purpose card is more flexible in terms of acceptance, be sure to choose one with the least onerous fees.

Tips for recipients

• Spend the cards as soon as possible. Treat them just like cash, which earns no interest, is subject to loss or theft, and loses value over time. Put them in your wallet immediately so they will stare back at you until you drain them.

• If you find yourself with a pile of unwanted cards, you might consider trading or selling them on a card exchange website. Several companies broker discounted sales and purchases of unused cards, a viable option if you are sure you will never patronize the issuing merchants. Start with GiftCardGranny.com to scope out the exchange scene.

• Holders of open loop bank cards have often had difficulty using their cards to make many online purchases, needing first to navigate a cumbersome and frequently unsuccessful registration process with the card issuer. PayPal has recently announced an interesting and innovative option, allowing shoppers to use their prepaid general purpose gift cards at any online merchant that accepts PayPal payment processing. No pre-registration with the card issuer is necessary, although PayPal will require some personal information. However, once you establish a free PayPal account, the process is seamless, convenient and secure.

Gift cards are a convenient and increasingly popular option for both giver and receiver. A little awareness of the various types and conditions will maximize the enjoyment.

Christopher A. Hopkins, CFA, is vice president for Barnett and Co. Advisors.