The Perils of Pre-Paid Gift Cards

As we head into the holiday season and start looking for gifts to give to those hard to buy for people, gift cards stand out as easy gifts that everyone enjoys. But if you’re thinking of giving a pre-paid gift card that’s branded with a credit card logo, you might want to think of another gift idea.

Sometimes called pre-paid gift cards, pre-paid debit cards, stored value cards, or gift credit cards, these cards are branded with the Visa, American Express, or Master Card logo and allow you to “load” them with money that the recipient can, in theory, use anywhere that the credit cards are accepted. They work like a debit or credit card in that they are processed through the main credit card networks and they carry a sixteen digit number that can be entered online, just like a credit card.

The idea is nice: Your gift recipient can use the money in many places and isn’t limited to just one store as with most gift cards. But there are problems that can end up being costly to both you and the recipient. Because there are many issuers of these cards, there are many different rules and fees dictated by the states, but here’s a general rundown of what to watch out for:

You must pay to buy the cards: You’ll pay a fee to purchase the card, usually based on the value of the card. It generally ranges from $3 – $10 dollars. You’re basically paying to give cash.

Expiration dates: Many cards expire within a year or two, unlike most store gift cards which are good forever. If your recipient puts it in their wallet and forgets, it won’t be long before the money is gone.

Reductions in the value of the card: While the card may not expire in it’s entirety for a year or two, many of these cards start charging “inactivity” or “maintenance” fees after as little as six months. These are not insubstantial, either. Many are in the $2-3 range, meaning it won’t take long to eat up the value of a $20 card. If your recipient puts the card aside hoping to save for something larger, they may get a rude surprise when they do try to use it.

They’re hard to use: Because these are processed like credit cards, they can be hard to use at a store. Say you have a $50 card and you want to buy $60 worth of stuff. Many stores are unable to process multiple payment types, so when you try to use the $50 card, the system denies your request because there’s not enough credit on the card. Similarly, if you try to get around that problem by turning the prepaid card into a store card so you can use it, thinking that it will be an even transaction ($50 prepaid card buys a $50 store card), the “hold” system associated with credit cards may ruin your transaction. Many credit cards place a small $1-2 hold on a card when it is swiped to prove that the card is valid. You usually don’t see it because it doesn’t matter when you use a regular credit card. But with a prepaid card, that $1 reduces your $50 card’s value to $49, meaning the $50 gift card you want can’t be purchased.

Fees for swiping: Some cards even deduct value from the card every time it’s swiped. So if you try to buy something and the cashier has to swipe your card a few times to get the transaction straight, you’re losing value with every swipe. I know of one person who tried to use the card to buy an item that was more than the value of the card and she was going to use cash for the difference. The store accepted multiple payment types, but the cashier wasn’t skilled at the process. It took four tries for her to get it right and $2.50 was deducted from the gift card for each attempt. The card ended up being worth $10 less by the end of it. The person had no recourse because the fee was listed in the booklet that came with the card.

Fees for loss of the card: If you lose a regular store gift card, most stores will replace it free of charge if you can provide the purchase receipt. Even if it’s been used they can track the money remaining and give you the correct amount. With a prepaid card, there will be a fee to replace the used card that may range from $4 – 10, which may eat up any remaining balance you may have had.

If you do give one of these cards, they come with a booklet listing all the fees and charges. Read it closely and encourage your recipient to read it, too. It’s small print just like all credit card agreements, but it does spell out everything you need to know and exactly what rights you have.

A simpler and better alternative is to simply give cash. It costs you nothing to give cash and your recipient can use it anytime, anywhere without worrying about fees and expiration dates. If you worry that cash seems crass and un-holiday-like, dress it up in a nice envelope and card or in a prettily wrapped box. Of course if your recipient has a favorite store, you can always get them a card for that specific store. Most retail gift cards have far fewer “gotchas” than prepaid cards. Pre-paid debit/gift cards have their uses, but they can make for gifts that are annoying and difficult to use.