Gift Cards: How They Work, Types, and Examples
BP
Summary:
Gift cards are prepaid debit cards that allow you to make purchases and perform financial transactions. They come in two main types: open-loop and closed-loop. Open-loop cards are versatile and can be used almost anywhere, while closed-loop cards are typically tied to specific retailers. Gift cards may have fees, expiration dates, and can even be used to withdraw cash from ATMs. However, it’s crucial to be aware of gift card scams, as scammers target these forms of payment. This article delves into the world of gift cards, their types, benefits, and potential risks.
What is a gift card?
A gift card is a prepaid debit card that contains a specific amount of money available for use for a variety of purchases. Store gift cards are designed to be used at specific merchants or retailers, while general-use prepaid gift cards are not affiliated with any specific merchant and can also be used to withdraw cash at automated teller machines (ATMs).
How a gift card works
Gift cards are a form of prepaid debit card that’s loaded with funds for future use. There are generally two types of gift cards: open loop and closed loop. Both types typically can be used online and in person.
Pros and cons
Closed-loop gift cards
Closed-loop gift cards are often marketed by stores, allowing a cardholder to purchase anything from that specified retailer. Closed-loop cards generally can be used only with a single merchant, either at the store or on its website.
However, if one company owns several different retailers, it might issue gift cards that can be used at any of them. Gap Inc. (GPS) is one such corporation: its cards usually can be used interchangeably at any of its affiliated stores, including Gap, Banana Republic, Old Navy, and Athleta.
Closed-loop gift cards usually will not require any activation fees. Also, these gift cards will not include a processor’s logo (the financial services company that actually handles the transaction mechanics), though they do include the merchant’s logo; in a sense, they act as advertising for the store.
Closed-loop gift cards usually are not reloadable, so once the balance is spent, they have no further use. Also, funds on a closed-loop gift card may have a specified expiration date, which requires the user to use the card within a set time frame. Closed-loop cards are popular gifts for wedding and baby registries. Many merchants also offer closed-loop gift cards as a bonus for individuals who sign up for their registries.
Open-loop gift cards
Open-loop gift cards offer the equivalent of cash—or more precisely, a credit or debit card that can be used at any merchant where that card is accepted, as well as online. Many of the major charge or credit card issuers/processors, such as American Express, Visa, Discover, and MasterCard, offer open-loop gift cards. These cards will display the payment processor’s logo and can be used to make all types of electronic payments nearly anywhere.
Open-loop gift cards also have the advantage of serving as a standard prepaid card. These cards are usually reloadable, allowing the user to add funds on their own as well.
Open-loop cards will sometimes require an activation fee of approximately $5, which must be paid when the card is purchased.
Digital gift cards
Gift cards debuted in 1994. Increasingly, merchants are opting to offer digital gift cards to customers as an incentive to encourage spending.
Upscale department stores, such as Saks Fifth Avenue and Bergdorf Goodman, send bonus gift cards to their loyalty program members (who have spent a certain amount during a promotion or over a certain time period). However, 75% of the volume in gift card program redemptions is still in physical cards vs. 25% for digital gift cards, according to a National Gift Card (NGC) industry survey.
Examples of gift cards
Gift cards come in various forms and are used for a wide range of purposes. Here are some examples of gift cards:
Retail gift cards
Retail gift cards are among the most common types of gift cards. They are specific to a particular store or brand. For example, you might receive a gift card for a popular clothing store, allowing you to shop for your favorite fashion items.
Restaurant gift cards
Many restaurants offer gift cards that can be used to dine in or order takeout. These are popular gifts for food enthusiasts and a great way to treat someone to a delicious meal at their favorite eatery.
Online retailer gift cards
Online retailers like Amazon offer gift cards that can be used to purchase a wide variety of products, from electronics to books. These gift cards provide flexibility in shopping for a diverse range of items.
Prepaid debit cards
Prepaid debit cards are essentially gift cards with the added benefit of being able to use them almost anywhere that accepts debit cards. They are reloadable, and you can add funds to them, making them suitable for various financial transactions.
Gift card regulations
Regulations and laws surrounding gift cards aim to protect consumers and ensure fair practices. These regulations can vary by region and country, so it’s important to be aware of the rules that apply in your area. Here are some common regulations:
Expiration dates
Some gift cards have expiration dates, meaning you must use the funds within a specified time frame. Understanding the expiration policy is crucial to avoid losing the card’s value.
Activation and reload fees
Certain gift cards may come with activation fees when you first purchase them. Additionally, reloading funds onto a card may incur fees. Always check for these fees to make informed decisions.
Tracking and registration
Many gift cards can be registered online, allowing you to track your remaining balance and freeze the card if it’s lost or stolen. Registering your gift card can provide extra security and peace of mind.
Using gift cards wisely
Gift cards are a convenient way to shop and make transactions, but using them wisely is essential. Here are some tips on how to make the most of your gift cards:
Budgeting tool
Consider using gift cards as a budgeting tool. Load a specific amount onto a gift card and use it for discretionary spending, helping you stay within your budget without dipping into your regular accounts.
Gifts and rewards
Gift cards are excellent gifts for friends and family. They offer the recipient the freedom to choose their preferred items. Additionally, many loyalty programs and promotions offer gift cards as rewards.
Avoiding scams
Stay vigilant against gift card scams. Be cautious when asked to use gift cards as a form of payment in suspicious transactions. Only purchase gift cards from reputable sources and avoid damaged or tampered cards.
The bottom line
Gift cards can be useful for shopping online or in stores. You may purchase them to give as gifts to friends and family, or it’s possible that you might earn gift cards as a reward when shopping with a particular merchant. Understanding how gift cards work and where you can use them is important for avoiding fees or the risk of having a gift card expire. At the same time, it’s important to be on the lookout for gift card scams—especially during the holiday season, when more people are buying them and using them to shop.
Frequently asked questions
What is the difference between open-loop and closed-loop gift cards?
Open-loop gift cards are not tied to any specific merchant and can be used almost anywhere. Closed-loop gift cards, on the other hand, are limited to use with a single retailer or brand, although there may be exceptions when one company owns multiple brands.
Do all gift cards have fees?
Not all gift cards have fees, but some may. Fees can include activation fees, reloading fees, and monthly or dormant-account fees. It’s important to check the terms and conditions of the specific gift card to understand any associated fees.
Can I use a gift card for online shopping?
Yes, in most cases, gift cards can be used for online shopping. Both open-loop and closed-loop gift cards are generally accepted for online purchases, providing flexibility in how you can use them.
Are gift cards safe to use for transactions?
Gift cards can be a safe way to make transactions, especially when compared to carrying cash. They may also offer additional security features when registered online, allowing you to track your balance and freeze the card if it’s lost or stolen. However, it’s important to be cautious of gift card scams.
How can I avoid falling victim to gift card scams?
To avoid falling victim to gift card scams, be vigilant and only use gift cards as a form of payment with trusted individuals or entities. Avoid purchasing gift cards that look damaged or tampered with, and never share gift card information with unknown or suspicious parties. It’s essential to stay informed and cautious to protect yourself from scams.
Key takeaways
- A gift card is a prepaid debit card that is loaded with a specific amount, which can then be used to make purchases and other financial transactions.
- Store gift cards (closed loop) are designed to be used for purchases at specific retailers, while general-use prepaid gift cards (open loop) may be used at a wider variety of locations.
- Some gift cards may allow for cash withdrawals at an automated teller machine (ATM).
- Closed-loop gift cards are usually not reloadable.
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