Gift Cards: Not Always the Easiest Holiday Present

What to know before you buy or use a gift card.

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If your Christmas stockings have been overflowing with gift cards in recent years, you're not alone. Deloitte's Annual Holiday Survey found that gift cards have been the most popular presents for six consecutive years, including 2009. Like most consumer goods, purchases of gift cards decreased last year, according to the National Retail Federation. But that change is related to the recession. Dave Sievers, a principal at Archstone Consulting, a business advisory firm, predicts that gift card sales will be flat or slightly down this holiday season, which is "in line with the retail economy as a whole." Still, the market for gift cards is so competitive that retailers are offering new bells and whistles to draw shoppers in, even stretching the definition of "card." "You have gift cards for baby showers shaped like a baby bottle, for example," says Sievers.

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For busy Americans who don't have the time or inclination to find the perfect gift for each person on their shopping list, a gift card is the next best thing. "It's a close substitute for cash," says Joel Waldfogel, an economist at the Wharton School of the University of Pennsylvania. "With a gift card, I can give cash without the social awkwardness."

But while it might be popular to buy gift cards, about 10 percent of the value on all those purchased gift cards goes unused by recipients. "We all have these drawers full of gift cards that never get used," Waldfogel says. Many states allow retailers to reclaim the value of unused gift cards after a couple of years. In his new book Scroogenomics , Waldfogel says that when shoppers buy gift cards, a good portion of the value might be going to the shareholders of large retailer chains because much of the unused value of the cards will go right back into the companies' coffers.

But even if shoppers remember to use their gift cards, there can still be problems. Cards issued by a financial institution—which can be used like cash at many different stores as opposed to just one—have recently come under scrutiny from regulators. The Federal Reserve issued new rules that apply to gift cards intended to "protect consumers from certain unexpected costs" such as hidden fees. But these regulations won't go into effect until 2010, so they won't help shoppers in the 2009 holiday season.

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Millions of Americans will both give and receive gift cards this year—64 percent of all consumers, according to the Deloitte survey. Here's how to get the most out of these gifts.

Recognize deadlines. One result of the popularity of gift cards has been a move away from expiration dates on the part of the providers. In response to consumer demand, retailers have mostly phased out limits on how long recipients can use a gift card. "You'd be hard-pressed to find a branded national retailer that has an expiration date," says Sievers. On the other hand, bank gift cards typically have expiration dates. The new Federal Reserve regulations, however, would require all gift cards to be good for at least five years.

There is evidence that the shift away from expiration dates makes cards less likely to be used. New research suggests that the shorter the period until a card reaches its expiration date, the more likely you are to use a card for an enjoyable activity or experience, like eating at an expensive restaurant or going to an amusement park.

Suzanne Shu and Ayelet Gneezy, marketing professors at the University of California-Los Angeles and the University of California-San Diego, are preparing to publish a paper describing experiments they conducted that show how deadlines affect consumers. One experiment looked at how a group of undergraduates used gift certificates for a piece of cake and drink at a cafe. Shu and Gneezy gave half of the test subjects certificates that expired in three weeks, and the other half received certificates that expired in two months. About 30 percent of subjects in the first group redeemed their certificates, while only 6 percent of the certificates received by the second group were redeemed. Follow-up surveys showed that the most common explanations for subjects not using the certificates were "I was too busy and ran out of time" and "I kept thinking I would do it later." Most of the test subjects who failed to use the certificates reported that they regretted not doing so.