They offer convenience but can come with hidden fees and wasted funds
Almost all retailers offer consumers gift cards as a way to shop or give money to friends and family. There are two types of gift cards—physical and digital (e-gift cards)—and each comes with a wide range of features and benefits.1 If you’re interested in purchasing gift cards for others during the holiday season or for birthdays or other occasions, or you want to buy them for yourself, it helps to understand how they compare with other payment methods.
Key Takeaways
- Gift cards can be a convenient and useful substitute for cash when you need to make purchases or want to give a gift to someone else.
- Physical gift cards can be used in stores or online, while digital gift cards are designed to be used online or over the phone.
- Digital gift cards can be added to mobile wallets to make purchases easier and more secure.
- It’s important to check physical and e-gift cards for expiration dates and/or fees if you plan to reload money on the card.
How Gift Cards Work
A gift card—also known as a stored value card—is a form of payment that can be used to make purchases at retail stores, gas stations, restaurants, and other locations. You load money onto the card, which you or the gift card recipient can spend at accepted locations.
Gift cards can be open-loop or closed-loop. An open-loop gift card can be used anywhere that brand of card is accepted. For example, if you have a gift card that’s branded with the Visa logo, you could use it to make purchases anywhere Visa is accepted.
A closed-loop card, on the other hand, can only be used at specific merchants. For instance, if you purchase a gift card from Starbucks or Amazon, you or the gift card recipient would be able to use it to make purchases only at the retailer issuing the card. Hybrid cards are an in-between option: They allow you to use a gift card at a number of merchants associated with the card, but are not accepted elsewhere.2
GiftCards.com. “What are Open Loop and Closed Loop Gift Cards?”
Some prepaid gift cards charge a fee to purchase them.3 You may also pay a separate fee to reload money on a gift card if you wish to reuse it.
Physical vs. Digital Gift Cards
Gift cards can be physical—meaning a plastic card—or digital. Digital gift cards have no physical form; instead, you’re assigned a unique gift code number that you can use to redeem at online retailers when making purchases. Physical cards remain the most popular kind of gift cards, in part because gift-card givers perceive them as being more in line with social norms than digital cards, according to recent research in Psychology & Marketing.4
Companies such as Amazon, Walmart, and Target allow consumers to purchase physical cards as well as to load online or digital accounts. Major restaurant chains, such as Starbucks, Chipotle, and Chili’s, also offer customers digital and physical gift cards. These cards make it convenient for customers to pay for their drinks and meals using an app or in-establishment card reader to speed up the checkout process.
You can also store codes for digital gift cards inside a mobile wallet app, such as Apple Pay or PayPal’s Venmo. Then, when you’re ready to check out, you can select your digital gift card as your preferred method of payment.5
Federal law prevents gift cards from expiring for up to five years after their activation date, but failing to use a gift card could trigger an inactivity fee.6
Pros of Gift Cards
Gift cards can offer a number of advantages. For example:
- They can be a good substitute form of payment if you’d rather not pay cash or use a credit card.
- Gift cards can be an appropriate gift for the holidays or for any other special occasion.
- You can use gift cards to control spending. (This can be helpful for avoiding bank overdrafts).
- They can be easy and convenient to use.
In terms of gift giving, gift cards might be preferable if you have no idea what to buy for someone, because they allow the recipient to buy what they want, when they want it. Just keep in mind that choosing a closed-loop gift card over an open-loop card can limit the recipient’s options for where they can use the card.
If you’re interested in using gift cards to help kids learn the basics of spending, you may want to research prepaid debit cards for teens. They work similarly but are typically open-loop.
Cons of Gift Cards
Gift cards can also have some downsides. Here are five.
- After purchases are made with a gift card, there may be a small amount of money left—which, if not used, ends up as money wasted.
- You may pay purchase or reload fees to add money.
- Closed-loop cards limit purchasing power.
- Losing a gift card or having it stolen can be a headache, especially if you have failed to register it or keep the gift card number.7
- You could be charged an inactivity fee if you fail to use your card within one year of the purchase date.6
While prepaid gift cards can be stolen or lost, just like a debit card or credit card, the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act offers protections for gift cards issued by retailers and banks.8
Prepaid Credit Cards vs. Gift Cards
When weighing the pros and cons of gift cards, it’s important to understand the distinction between them and prepaid debit or credit cards. While you might purchase a gift card to give away, a prepaid credit card is something you might use yourself for everyday spending if you don’t have a bank account or would rather not pay with cash or a regular credit card.9
There are several cards offered by prepaid credit card companies that give consumers the ability to buy cards and reload them at retail locations. For example, the PayPal Prepaid MasterCard allows users to easily transfer money between their PayPal account and a physical card that can be used anywhere that MasterCard is accepted.10 Note, however, that there may be fees involved in using these prepaid cards.11
Consider a secured credit card if you have no credit or poor credit. These cards typically require a small cash deposit, but they can be a stepping-stone for building a credit history.12
Prepaid credit cards, debit cards, and reloadable gift cards generally offer better value than retailer-specific gift cards, but regular credit cards can offer some advantages when it comes to earning rewards on purchases or taking advantage of card-specific features, such as travel incentives or rewards bonuses.
Something else to keep in mind when weighing whether to use prepaid credit cards or gift cards for purchases is how they affect your credit score. These types of accounts are not loans, as you’re not borrowing money, so they won’t show up on your credit reports.13 This means that they don’t help to build your credit history. If you’re looking for a way to establish or improve your credit, a regular credit card can help you do that. Paying on time each month, keeping your balances low, keeping older credit card accounts open, and limiting how often you apply for new credit can help you grow your credit score over time.14
