Do Your Friends a Favor and Give Cash, Not Gift Cards

Last Updated Oct 26, 2009 6:06 PM EDT

Do you know whether the gift cards you're presenting to friends and relatives come with a slew of fees? If you're like most people, the answer is a resounding "no," according to a just-released study by the Consumer Federation of America.

Americans will spend roughly $4 billion on high-fee gift cards this year, often without realizing that the card they're giving comes loaded with a myriad of fees, said CFA executive director Stephen Brobeck at a press conference today. Only a fraction of those surveyed knew that general-purpose gift cards cost money to purchase and can impose monthly fees.

A new law will restrict some of the fees, but not until next August--way too late for the gift cards you might be contemplating for this holiday season.

Quick primer
There are two types of gift cards--those offered by individual retailers (such as Best Buy or iTunes) and general purpose cards issued by the likes of Visa, MasterCard and American Express. While the general purpose cards can be used at more locations, they also typically come with a pile of fees, such as fees to buy them; fees to "re-load" them; and monthly inactivity fees, if you don't use them fast enough.

Worse, some retailers won't let you "split" a purchase, paying for part with a gift card and part with cash, which means that consumers are sometimes unable to spend the remaining balance on the cards. If that wasn't bad enough, the cards can expire, so what you paid $50 for could end up a worthless piece of plastic in your grandkid's wallet.

Gift cards issued by individual merchants typically don't have these fees or expiration dates. But if the retailer goes belly-up, you and your gift card could end up in a long line of hapless creditors in the retailer's bankruptcy.

Consumer Federation and the National Association of Consumer Agency Administrators are distributing 1.5 million copies of a free gift card wrapper that warns card recipients about gift card risks. If you choose to give gift cards this holiday season, it might be smart to download a few copies, so the recipients can read the warnings.

But here's a better idea: if you don't know what to buy your child, grandchild, niece, nephew, friend or associate, give cash. (Checks fall neatly into this category, and are a better choice if you're sending a gift by mail.) You can spend cash anywhere. It doesn't expire. And there are no fees to use it.

If you think cash is too impersonal, buy a nice card to go with it and write a personal message, like, "I thought you might want a new video game, but heard that "pong" is no longer all the rage. Under those circumstances, it seems better that you pick it out."

A lot of marketing dollars have gone into convincing you that giving gift cards is better than giving cash, but that doesn't make it true.

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