Thinking about giving someone a gift card for Christmas? You are not alone. Last year, billions of dollars of gift cards were purchased in the days and weeks leading up until Christmas. In fact, Google reports that searches for "Gift Cards" continue to rise until December 26th when they finally peak. I guess some people are looking for after last-minute gift ideas.
Not long ago, Gift Cards replaced the gift certificate as the present to give to someone that either you don’t really know what to get for them, for people who are very picky (and thus better off picking out their own gift), for people you don’t want to bother shopping for, and for people on your gift list who live far away because gift cards can be shipped easily and cheaply tucked into a Christmas card.
Reports about gift card tricks and things to beware of when buying gift cards have those with savvy financial planning skills looking for unbiased financial advice about whether or not giving gift cards is a good idea. Fortunately, in most cases, giving them as presents works out just fine for everyone.
Gift Cards Losing Value
There are some concerns regarding Gift Cards, particularly around the "features" that cause them to lose some of their value over time. Fortunately, the most egregious of these terms have been pretty much weeded out by continuous news coverage and frequent sob stories regarding small children, or little old ladies whose gift cards ran down to zero value while they were unable to shop.
Even so, many gift cards continue to come with a provision that has them expire after a certain amount of time, or to slowly lose their value each month. The truth is that there is a very legitimate reason for treating gift cards this way. A gift card is a debit, or liability, for the business that issued it. Since they were already paid cash for the card, and they are obligated to redeem the card for an equal amount of goods or services, a gift card acts like an IOU on the books of a business. However, unlike other debts, the business has no way of projecting when, or if, the liability will ever come due. Carrying around $1 million worth of liabilities for gift cards issued so long ago that there aren’t very likely to ever be cashed in, is a headache for all kinds of companies. The expiration date, or the countdown value draining ticking time bomb gives the accountants an end date when they no longer have to account for the possibility that cards will be redeemed.
This is not a new practice. Gift certificates had expiration dates printed on them as well. The problem that gift cards had was that the expiration date, or the terms of use that stated when and how the gift card lost value were either printed in fine print on the back (that no one read) or, even worse, not on the card at all and part of the terms and conditions that were published elsewhere on the website or contract / agreement that one had to specifically ask for. So, when people went to use their gift cards, they were surprised, and very angry, to find out that they had lost value or expired.
Gift Cards Very Profitable
Gift cards are very profitable for businesses. Much like mail-in rebates, a lot of gift cards are never redeemed completely. Many people who get a gift card go to the store and pick out something that costs less than the total value of the gift card, so that they can get it for "free". The remaining amount on the card is often forgotten all about. Even if the person finds the card in their wallet or drawer at a later date, they likely remember that they already used it, and just throw it away. Or, the remaining value is so small as to not make it worth the hassle. All of this unused money adds up to big profits for businesses and retailers.
The major credit card issuers have an even better deal going. By offering card redeemable anywhere MasterCard or Visa are accepted, they can sell even more cards, and they have to do even less to process and account for them. Some banks let you double dip for more credit card rewards points by giving you miles or points for the full purchase price of the gift card.
In order to not kill the golden goose of gift cards, most merchants have much kinder terms regarding their cards. They either don’t lose value over time, or lose their value much more slowly. Many cards have no reducing amount feature and just have a regular expiration date, which people tend to view more favorably.
So, if you plan to give gift cards this holiday season, there is no need to worry as long as you are buying them from a reputable merchant. After all, it is worth much more to Best Buy to keep selling gift cards for years to come than it is to screw over a bunch of people this year and get a little extra profit, but a bunch of publicity that will keep gift givers from buying their cards next time.
Thank you for the article. There have been many points made in this article but I like when you further discuss the gift cards potentially loosing value. The reason why I found this section interesting is because, like you also noted, many merchants have been a lot “better” about reducing monthly fees or even expiration dates to those that are much more favorable to the consumer. These merchants must have determined that it was worthwhile for them to have less restrictions on the gift cards to encourage more consumers to purchase their gift cards over their competitors gift cards. Thanks again!