If Alvin the Chipmunk were to beg for his beloved hula hoop these days, there’s a decent chance he wouldn’t find one wrapped beneath the Christmas tree. Instead, he might be more likely to receive a much smaller plastic item — a gift card. That way, the giver might insist, Alvin could select the perfect hula hoop that would make all of his holiday dreams come true.

The rise of the gift card has been a stress reliever for the time-crunched holiday shopper and the ultimate detriment to gift-giving etiquette for others. On the one hand, gift cards offer a one-stop-shopping solution that gives recipients the freedom to pick out what they’d like. On the other hand, around a quarter of people polled by the National Retail Federation consider gift cards to be thoughtless presents.

But whether or not you agree that it’s bad manners to give a gift card to someone, their popularity is undeniable. The growth of the gift card market — including sellers from retail stores, restaurants, banks and credit card companies — took off beginning in 2002 [source: Reuters]. Now, gift cards are the most requested retail holiday present among both men and women, with almost 55 percent of people reporting that they want one [source: National Retail Federation]. Sales figures indicate that those gift wishes will likely come true. In 2007, Americans spent an estimated $97 billion on gift cards, and experts expect that number to grow in 2008 [source: Nolan].

­­The beauty of gift cards from a marketing perspective is that they make the arduous task of holiday shopping much easier. No more sifting through racks of sweaters or hunting down the perfect gadget; simply walk up to the register, pick a denomination and pay. Evidently, that’s a pretty strong selling point, since more than two-thirds of holiday shoppers plan to purchase at least two gift cards for people on their list [source: Associated Press].

If you think of gift cards hold the ultimate key to retail freedom, think again. True, they may save you a few minutes in the mall, but they probably aren’t saving you — or their beneficiaries — any coin.

Buying and Using Gift Cards

Americans dropped $97 billion on gift cards in 2007.
Americans dropped $97 billion on gift cards in 2007.

­I­n 200­8, gift card sales could cross the $100 billion mark. One reason people have cited for buying multiple gift cards as holiday presents relates to economics [source: National Retail Federation]. It’s simple to budget out your expenses if you’re using gift cards. But there may be hidden costs associated with gift cards, so it pays to know what’s involved.­

If you want to buy a gift card for someone on your shopping list, you can choose from two types of gift cards: open loop and closed loop. Generally, open loop gift cards are sold by banks or credit card companies, and recipients can spend them at a variety of businesses. These are the closest equivalent to giving someone a pile of cash. However, you’re more likely to encounter hidden fees and expiration dates with open loop cards. To avoid those pitfalls, consumer advocates recommend investigating any expiration dates, fees or other restrictions before buying an open loop card.

Gift cards that you can use only at specific retail chains or restaurants are called closed loop. Most closed loop cards don’t have any activation or transaction fees since it’s easier for retailers to make their money back — and more — from gift card sales. But keep an eye out for expiration dates with closed loop cards. Some may also have dormancy fees that reduce the value of cards the longer they go unredeemed.­

­When someone gives you a gift card, your best plan of action is to spend it. Only a third of people redeem gift cards within 30 days, and after that, the number of unspent gift cards climbs [source: Nolan]. Yet, when you decide to put your gift card to use, remember your personal budget as well. More than half of shoppers who redeem gift cards end up spending more than the card value. And we aren’t talking a few pennies more. According to the National Retail Federation, people spend between 15 and 40 percent more than the gift card denomination.

­Overspending isn’t the only way that businesses profit from gift cards. Not using them at all has fattened up some corporate accounts more than Santa Claus’ belly.

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