Holiday gift card: A gift with strings attached
By Kristin Arnold • Bankrate.com

Editor's note: This is the 2005 version of the gift card survey. See the latest version here.

For many, gift cards are the perfect size and color. But watch out -- they often lose value or expire, Bankrate's 2005 survey finds.

The survey underscores the importance for both gift givers and receivers to look closely at the strings attached to gift cards. The buyer can be hit with purchase fees, activation fees and shipping fees, while the user can be whacked again with inactivity fees or redemption fees. Be careful or your $50 dollar gift card may not be worth $50 for very long.

For the second straight year, Bankrate.com has surveyed the top 20 leading retailers -- several of which issue cards under more than one store name -- and top four credit-card issuers to examine the fees, expiration dates and dormancy policies associated with gift-card purchases. A total of 34 cards were examined.

Among the findings of this year's survey:

• The offerings from the retail stores were generally more consumer friendly than those of the credit card issuers. Only four retail stores (Costco, Albertson's, Macy's and Bloomingdale's) place expiration dates on their gift cards. Those expiration dates range from two to five years. All four cards backed by the major credit card issuers -- American Express, Visa, MasterCard and Discover -- have expiration dates, and that can arrive as quickly as six months.
• Five out of the 34 gift cards listed in our survey assess fees if you don't activate within 12 to 24 months. These issuers expect you to use the card or you will lose a percentage of your money every month.
• Comparing Bankrate's 2004 holiday gift card survey to this year's survey, fees are relatively unchanged, with one credit card issuer (Visa) adding a purchase/activation fee of up to $10.95. Bloomingdale's dropped a $2 purchase/activation fee.
• You may have to order your gift card earlier this year, as many of the retailers have indicated longer delivery times.
• They are becoming available in more monetary units. Some companies also give you specific denomination amounts if you order by phone as opposed to the Internet.

It's all in the cards
Gift cards have become increasingly popular: The average consumer will spend $88.03 on gift cards in the 2005 holiday season, 15.6 percent of their holiday gift budget, according to the National Retail Federation. Christmas gift card purchases accounting for more than $17 billion in sales in 2004. That number is expected to be $18.48 billion for the 2005 holiday season. "The popularity and convenience of gift cards are here to stay," says Karen Larsen, vice president of marketing and product marketing for ValueLink, a leading provider of information processing and related services.

Larsen says that, among other positives, gift cards provide a wonderful branding opportunity for retailers.

"Gift cards also offer increased in-store sales, because consumers tend to view gift cards as free money and will spend more than the denomination on the card. It's also a win-win situation for consumers because of their flexibility and choice."

But with the positives also come the negatives -- especially when gift cards are fattened with fees that either require the user to spend the amount on the card in an allotted time or when companies demand surcharges for buying the card.

Larsen says that although expiration dates and fees still remain, the trend in the past two years has been away from them.

"Retailers recognize the benefit of a positive customer experience." Over the years, she said, "many retailers have done away with the fees and expiration dates."

The fees can add up. Let's say you want to buy a $25 American Express gift card for a friend. If you call them on the phone, they'll charge you a $7.95 purchase fee, plus a $5.95 fee for shipping it to your friend. And if your friend decides he'd rather have cash, there's a $10 fee for cashing it in, too. You paid almost $39 for your friend to end up with $15.

Expiration dates continue to be a major pitfall when using gift cards. The number of cards with expiration dates went unchanged from 2004 to 2005.

Four of the 20 retailers and all of the credit card issuers surveyed by Bankrate continue to place expiration dates on their gift cards. The expiration dates range from six months to two years.

Dan Horne, associate professor at Providence College and an expert on gift cards, says that fees and expiration dates are the result of accounting rules covering the way the retailer moves income from the balance sheet.

"Basically, gift card and certificates sales are not booked as revenue until redeemed," he says. "If they are never redeemed, then you never realize the income, even though you have the money sitting in the bank. The fees let you transfer some of that money to income every month."