Beware Of Gift-Card Restrictions, Scams

Gift cards are easy gifts to give. They cut down on wrapping and free the giver of having to think to hard. But as The Early Show financial contributor Ray Martin writes, they are full of sneaky terms and conditions.

Most shoppers plan to buy holiday gifts for a long list of family, friends, co-workers, teachers and babysitters. With so many to buy for, it's no surprise that gift cards have become one of the most popular gifts to buy. According to industry experts and surveys, nearly seven of every 10 consumers will purchase at least one gift card this holiday season.

Sales of gift cards have surged and are expected to top $24 billion this year. It's easy to see why gift cards are as popular as they allow shoppers to visit fewer stores, purchase and wrap fewer items, shop on-line, finish shopping sooner and avoid the dreaded post-holiday season exchange of unwanted gifts.

When buying gift cards, you should understand that you are exchanging cash for a plastic card that comes with stored value and restrictions. The recipient of a gift card wants to use it to get what they want, where they want to get it and use all of the stored value with the least restrictions possible. It sounds simple, but it's not always.

For many, buying and getting a gift card is a no-brainer, but before you buy a gift card for someone, or if you receive one, there are some things you need to know.

Basically there are two main categories of gift cards: "use anywhere gift cards" issued by credit card companies and "proprietary gift cards" issued by retailers.

According to the Third Annual Holiday Gift Card Survey by Bankrate Inc., all "use anywhere" gift cards issued by the four top credit card issuers (American Express, Discover Card, MasterCard and Visa) carried fees. Most gift cards issued by retailers rarely, if ever, carry fees. The only way "use anywhere" cards make money for the credit card issuers is through the fees they charge. Retailers, on the other hand, profit from the merchandise people buy from their stores with their proprietary gift cards.

Rules and fees will vary depending on where you buy a gift card. For example, some proprietary gift cards expire after a period of time. Other gift cards have a monthly fee that eats away at the gift card value if the card is not used by a certain date.

The bottom line is that gift cards can be a great option, but if you buy or receive a gift card this year, it's wise to know about the most important terms and conditions of gift cards.

Here are some terms to keep in mind:

Expiration Dates: Some gift cards expire after 12 to 24 months if not used. About 13 states have passed that prohibit expiration dates on gift cards. Retailers who care about their customers do not do this. For example, Sears no longer imposes a five-year expiration date on their store bought gift cards and Costco eliminated its expiration date on its electronic gift cards.

Gift cards sold in some states cannot expire sooner than seven years. Some states require full consumer disclosure by any retailer selling a gift card that expires. In other states, unredeemed gift cards are considered abandoned assets after three years and are turned over to the states unclaimed property departments. New federal laws require expiration dates to appear on the front of each "use anywhere" gift card issued by credit card companies and include a clear disclosure of their fees.

Purchase or Delivery Fee: The average purchase or delivery fee for gift cards issued by credit card companies is $3.60, which is tacked onto the price of the gift card when it is purchased. Discover's gift card costs $3.95, Amex charges $3.95 and a Citi Prepaid Master Card costs $9.95. At lower levels of value, these "use anywhere" cards make no sense. When a $50 gift card costs a $10 issuance fee, then the fee is 20 percent of the actual gift value!

But even with these fees, "use anywhere" cards — for higher levels of value, of course — might be the ideal gift for a grandparent who has no idea where their grandchildren shop.

Maintenance or Inactivity Fees: Most "use anywhere" and a few proprietary gift cards charge maintenance fees. If you don't use your gift card during the first 12 months, after that, $2 to $3 per month is deducted from the cards value.

Some gift cards even charge these monthly fees retroactively back to the date of purchase, which can quickly eat up all or most of the gift cards value if a recipient does not redeem the card soon after they receive it. This is also one trick gift card providers use to get around laws that prohibit expiration of gift cards.

Replacement Fee: Many gift cards will now allow you to register the card on their Web site, so you can check the remaining balance and request a new card to replace one that is lost or stolen. Other gift cards provide a toll-free phone number to call to report a missing or stolen card. When replacing a lost or stolen gift card, you will need to provide the tracking number and a copy of the original receipt, so record and keep the original receipt in a safe place. For some cards, the value will not be replaced if lost or stolen. Other gift cards may charge $10 to replace a lost or stolen gift card.

Other fees on gift cards can include transaction fees charged for a high number of smaller transactions and fees for balance inquiries.

Usage Limitations: Some gift cards can be used at any store location. Others can be used only at stores that are affiliated with the merchant from which the card was purchased. Some may not be used for purchases in a catalogue or on the merchant's web site.

According to the Bankrate study, Wal-Mart, Costco, Target, Macy's and Kohls allow use of their electronic gift cards to only be used for online or catalogue purchases. JCPenny has figured out that this annoys customers and so they allow their e-gift cards to be used for in-store purchases.

Other limitations on gift cards include a prohibition against selling your card to another individual, or applying the value as a payment to a store credit card account, or redeeming the card for cash.

Make sure to check out the gift card's usage restrictions because the last thing you want to do is to buy a gift card that can only be used online and give it to your Aunt Jean who does not know how to use a computer.

Gift Card Scams: A widely circulated e-mail by a sheriff's department in Oregon suggests that consumers are being defrauded of the value stored on the gift cards they buy off the rack in stores.

The scam works like this: The bad guy makes note of the numbers on the gift cards displayed for sale. Then a few days later, they call into the gift cards customer service center to see if the card has been activated — activation of a gift card happens when it is purchased and a value is stored on it. When the thief finds that a gift has been activated, they use it to make purchases online, where physical presentation of the gift card is not required. The unsuspecting consumer who later tries to use the gift card finds that the value of the card has been depleted.

How to avoid most of these gift card scams: