Are gift cards ultimately a waste of money?

Buying and Using Gift Cards

Americans dropped $97 billion on gift cards in 2007.
Americans dropped $97 billion on gift cards in 2007.
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­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.

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.