Are gift cards ultimately a waste of money?

According to a survey from the National Retail Federation, gift cards top people's holiday wish lists.
According to a survey from the National Retail Federation, gift cards top people's holiday wish lists.
Joe Raedle/Getty Images

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­If Alvin the Chipmunk were to beg for his beloved hula hoop these days, there's a decent chance he wouldn't find one wrapped beneath the Christmas tree. Instead, he might be more likely to receive a much smaller plastic item -- a gift card. That way, the giver might insist, Alvin could select the perfect hula hoop that would make all of his holiday dreams come true.

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The rise of the gift card has been a stress reliever for the time-crunched holiday shopper and the ultimate detriment to gift-giving etiquette for others. On the one hand, gift cards offer a one-stop-shopping solution that gives recipients the freedom to pick out what they'd like. On the other hand, around a quarter of people polled by the National Retail Federation consider gift cards to be thoughtless presents.

But whether or not you agree that it's bad manners to give a gift card to someone, their popularity is undeniable. The growth of the gift card market -- including sellers from retail stores, restaurants, banks and credit card companies -- took off beginning in 2002 [source: Reuters]. Now, gift cards are the most requested retail holiday present among both men and women, with almost 55 percent of people reporting that they want one [source: National Retail Federation]. Sales figures indicate that those gift wishes will likely come true. In 2007, Americans spent an estimated $97 billion on gift cards, and experts expect that number to grow in 2008 [source: Nolan].

­­The beauty of gift cards from a marketing perspective is that they make the arduous task of holiday shopping much easier. No more sifting through racks of sweaters or hunting down the perfect gadget; simply walk up to the register, pick a denomination and pay. Evidently, that's a pretty strong selling point, since more than two-thirds of holiday shoppers plan to purchase at least two gift cards for people on their list [source: Associated Press].

If you think of gift cards hold the ultimate key to retail freedom, think again. True, they may save you a few minutes in the mall, but they probably aren't saving you -- or their beneficiaries -- any coin.

 

Buying and Using Gift Cards

Americans dropped $97 billion on gift cards in 2007.
Americans dropped $97 billion on gift cards in 2007.
DreamPictures/VStock/Getty Images

­I­n 200­8, gift card sales could cross the $100 billion mark. One reason people have cited for buying multiple gift cards as holiday presents relates to economics [source: National Retail Federation]. It's simple to budget out your expenses if you're using gift cards. But there may be hidden costs associated with gift cards, so it pays to know what's involved.­

If you want to buy a gift card for someone on your shopping list, you can choose from two types of gift cards: open loop and closed loop. Generally, open loop gift cards are sold by banks or credit card companies, and recipients can spend them at a variety of businesses. These are the closest equivalent to giving someone a pile of cash. However, you're more likely to encounter hidden fees and expiration dates with open loop cards. To avoid those pitfalls, consumer advocates recommend investigating any expiration dates, fees or other restrictions before buying an open loop card.

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Gift cards that you can use only at specific retail chains or restaurants are called closed loop. Most closed loop cards don't have any activation or transaction fees since it's easier for retailers to make their money back -- and more -- from gift card sales. But keep an eye out for expiration dates with closed loop cards. Some may also have dormancy fees that reduce the value of cards the longer they go unredeemed.­

­When someone gives you a gift card, your best plan of action is to spend it. Only a third of people redeem gift cards within 30 days, and after that, the number of unspent gift cards climbs [source: Nolan]. Yet, when you decide to put your gift card to use, remember your personal budget as well. More than half of shoppers who redeem gift cards end up spending more than the card value. And we aren't talking a few pennies more. According to the National Retail Federation, people spend between 15 and 40 percent more than the gift card denomination.

­Overspending isn't the only way that businesses profit from gift cards. Not using them at all has fattened up some corporate accounts more than Santa Claus' belly.

Unredeemed Gift Cards

Best Buy raked in $43 million in unredeemed gift cards in the 2006 fiscal year.
Best Buy raked in $43 million in unredeemed gift cards in the 2006 fiscal year.
Justin Sullivan/Getty Images

­From a fiscal perspective, statistics show that gift cards aren't the savviest holiday gift choice for the consumer. For starters, between 8 and 10 percent of gift cards go unredeemed. They sit in the back of people's wallets, hide away in clothes drawers or get tossed into the trash accidentally. Those stray gift cards added up to a whopping unspent $8 billion in 2007 [source: Nolan]. That's more than double the amount of annual credit and debit card fraud in the United States [source: TowerGroup]. Best Buy corporation profited $43 million in the 2006 fiscal year thanks to neglected gift cards [source: ConsumerReports]. When companies claim the profits from unredeemed gift cards as income, it's referred to as breakage.

State governments have been vying for a slice of that breakage pie. More than 30 states have enacted laws to equate unused gift cards as unclaimed property after designated time periods or gift card expiration dates [source: Associated Press]. These escheat laws allow states to collect a portion of the profits of the unredeemed gift cards from their respective companies. States are able to do this with retail and restaurant gift cards because closed loop gift cards are subject to state-level oversight. The federal government handles open loop ones from banks and credit card companies. Although not all companies willingly comply with escheat laws, many states, including Delaware, Alabama and Indiana, have added millions of dollars to their coffers thanks to abandoned gift cards.

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In a testy economy, retail and restaurant gift cards carry an added risk of becoming worthless as well. If you buy a gift card from a store, and that store shuts down before someone cashes in the card, it's basically as good as gone. When Sharper Image declared bankruptcy in 2008, it did so with around $20 million left in outstanding gift cards. To remedy the situation, the stores were allowed to accept the gift cards -- but only as long as the shopper spent double their cards' values.

­When the economy is in a downturn, it may be more prudent to spend a little more time and seek out gift card alternatives for a better bargain. Retailers want customers in their stores, and will crank up the s­ales to make that happen. In that case, instead of snagging a $50 gift card, you could leave with a sweater marked down to $35. Even if the recipient isn't a fan of argyle and wool, it's the thought that counts, right?

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Sources

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