The Plastic Present:
How to Make the Most of a Gift Card Purchase

Is a loved one’s birthday coming up, but you have no idea what to give? You may be tempted to buy a little piece of plastic instead of a tie, jewelry, or some other “risky” item. Called gift cards, these nifty items are debit cards with a prepaid balance. While they can be an easy way to make someone happy without having to guess taste or need, be aware that you can pay a premium for the convenience if you don’t shop around first.

What they are
There are two basic varieties of gift cards:

• Store gift cards, which can only be used at a particular retail establishment.
• “General-purpose” gift cards sporting the American Express, Visa, or MasterCard logo, which can be used virtually anywhere.

For both, all you have to do is load them up with the cash value of your choice and they are good to go. Many come with pretty pictures (images of holidays and birthday scenes, for example) and attractive packaging too.

So which type should you buy? If you want to make the most of your money, give a store card, since they tend to have no or very low fees. However, if want the recipient to have maximum shopping flexibility, go for the general-purpose gift card. While they tend to be fee-heavy (which can erode the value of your giving dollars), the shopper isn’t limited to one specific store.

The advantages
Of course if you are simply stumped over what to get someone, any gift card may be better than a random selection. They are easier to use than paper gift certificates, safer than cash, and more festive than a check. Just figure out how much you want to spend and choose a store or financial institution. All the recipient has to do is shop. In the case of the general-purpose card, the “giftee” can even take out cash at an ATM.

Another benefit is that they can be used as an effective tool to introduce the concept of credit to children and young adults. Since gift cards look and act much like credit cards, if you give one to a minor they will begin to become accustomed to using plastic. There will be no bill to pay at the end of the month, but there is a limit on how much they will be able to spend, so they can learn to be savvy consumers early.

The drawbacks
Both types of gift cards come with a few downsides. Most expire within a year or two, but some in as little as six months. If the recipient wants to close the card out for the remaining stored value, he or she may be charged a “closure fee” to do so. Lost or stolen cards may be replaced with a new card for the remaining balance, but "reissue fees" range from $4 to $6, so it may not be worth the effort if the remaining value is small.

Because general-purpose cards can come with extensive fees, be sure to weigh the costs and comparative shop before you buy. The terms will be apparent on the application.

First, when you purchase the card, you pay a fee based on the denomination. These range from about $6 for cards loaded with $25 to $300, and $8 for amounts above that. While that may not sound like much, $6 for a $100 card is about six percent of the card’s value. The lower the dollar figure, the more expensive, ratio-wise, the fee becomes.

Also, while many of these cards do allow ATM access, the transaction fees can be steep – from $1.50 to $5. And if the card is used at an ATM not owned by the issuing financial institution, even more charges will be deducted. Service fees are another consideration. If all the stored value isn’t used within a specific time frame (typically six months), most institutions will charge a monthly "service fee" of a few dollars to keep it active. Want to speak to a customer service agent? There could be a fee for that too.

Gift cards can indeed be a great present. But before you buy, shop around for a card with the least amount of fees and restrictions. That way your dollars will stretch the furthest and your loved one will reap the most from your generosity.