Gift cards don't rip, fit in your wallet just like a credit card and can be spent for something you really want. It's better than being stuck with an ugly sweater that doesn't fit! While they're becoming more popular by the minute, there are some hidden traps to watch out for.

Some Basics

Gift cards are plastic cards that look and work like credit cards. You swipe them at the cash register at the store, or give them to a waiter at a restaurant, to pay for whatever you've bought.

You can find them practically anywhere, including stores, banks and online. Usually, they're linked to a specific store, bank or credit card company, like Visa or MasterCard. They come in preset amounts, such as $25, $50 or $100, or in any amount you want, up to a preset maximum. Some cards can be reloaded with extra amounts of cash, but most just expire when the balance is spent or after a certain period.

Many see gift cards as a way to stretch gift-giving value and making gift-giving easy. But, it's important to know exactly what you're getting - or giving - with this gift.

New Rules

A new federal law, the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act), made sweeping changes to protect credit card users. It also created new rules to protect people who buy and use gift cards.

Expiration Dates

Under the CARD Act, gift cards sold after August 22, 2010 must be good for at least five years. The clock begins to run on the date the card was sold or "issued." If the card can be reloaded, the clock starts on the date it was last reloaded.

This is a big change. In the past, gift cards could expire as early as six months after being issued. If all of the money wasn't used, it was lost - the store or bank kept it.

Fees

Yes, there are fees involved with gift cards. It costs money to make cards, keep track of their use, balances, etc. The CARD Act has new rules for many common fees.

For example, in the past, if the entire value of a card wasn't used within a certain time, like six months, the card was charged $2 or $3 a month as a maintenance fee (a.k.a. service, dormancy or inactivity fee). This and other fees could be charged every month. The card would dwindle to nothing without you knowing unless you kept track of the balance.

Under the new rules, this type of fee can't be charged unless all of these things happen:

  • There's been no activity on the card for one year
  • Only one fee is charged per month
  • Information about fees are on the card and the buyer was told about the fees when it was bought

Expired card? In the past, if your gift card expired with money still on it, you could get a replacement card if you paid a fee, usually around $5. Under the new rules, you can't be charged this fee. However, if the card is lost or stolen, you'll likely have to pay a reissue fee, usually $5 or more . And don't be surprised if you're asked for the original receipt and card number to verify the initial purchase.

More fees. There are other fees to know about, too:

  • Fees for buying card - usually called initial issuance fees, as well as shipping fees if the card is bought online or through the mail. These fees can add up, so it's best to shop around and buy a card in person when possible
  • While bank gift cards can be used at many retail stores, banks charge higher service fees than retailers. It pays to shop around to find the lowest possible fees. There may also be ATM charges when you use bank gift cards
  • If you don't use up the entire value of the gift card, you may be charged a cash-out or closure fee of up to $15 to get the remaining balance

The National Retail Federation urges consumers to watch out for unexpected costs hidden in the fine print on the back of the card or on the information sheet that comes with it. It's good advice - if the card actually says anything or there's an information sheet.

Enter the CARD Act. Beginning January 31, 2011, gift card issuers are required to be upfront about all fees and expiration dates. This information has to be on or with gift cards before they're sold. In addition, a toll-free number, and a web site if available, must be included on the cards so card owners can get fee information, instructions for getting a replacement card, etc.

State Laws

Before the CARD Act, many states had gift card laws. California and Massachusetts have laws that are even tougher than the CARD Act in some things. Gift cards have to be good for seven years in Massachusetts, for example.

If you have a question or a problem with a gift card and can't get help from the company or bank that sold it, contact your state's attorney general's office or consumer protection agency, or file a complaint with the US Federal Trade Commission.

Questions for Your Attorney

  • Are minors allowed to use gift cards?
  • What happens to the balance on a gift card if the store goes out of business?
  • Does using a prepaid Visa, MasterCard, or other bank card affect my credit rating?