What Are the Pros and Cons of Gift Cards? (2024)

Almost all retailersoffer consumers gift cards as a way to shop or give money to friends and family. There are two types of gift cards—physical and digital (e-gift cards)—and each comeswith a wide rangeof features and benefits. If you’re interested in purchasing gift cards for others during the holiday season or for birthdays or other occasions, or you want to buy them for yourself, it helps to understand how they compare with other payment methods.

Key Takeaways

  • Gift cards can be a convenient and useful substitute for cash when you need to make purchases or want to give a gift to someone else.
  • Physical gift cards can be used in stores or online, while digital gift cards are designed to be used online or over the phone.
  • Digital gift cards can be added to mobile wallets to make purchases easier and more secure.
  • It’s important to check physical and e-gift cards for expiration dates and/or fees if you plan to reload money on the card.

How Gift Cards Work

A gift card—also known as a stored value card—is a form of payment that can be used to make purchases at retail stores, gas stations, restaurants, and other locations. You load money onto the card, which you or the gift card recipient can spend at accepted locations.

Gift cards can be open-loop or closed-loop. An open-loop gift card can be used anywhere that brand of card is accepted. For example, if you have a gift card that’s branded with the Visa logo, you could use it to make purchases anywhere Visa is accepted.

A closed-loop card, on the other hand, can only be used at specific merchants. For instance, if you purchase a gift card from Starbucks or Amazon, you or the gift card recipient would be able to use it to make purchases only at the retailer issuing the card. Hybrid cards are an in-between option: They allow you to use a gift card at a number of merchants associated with the card, but are not accepted elsewhere.

Some prepaid gift cards charge a fee to purchase them. You may also pay a separate fee to reload money on a gift card if you wish to reuse it.

Physical vs. Digital Gift Cards

Gift cards can be physical—meaning a plastic card—or digital. Digital gift cards have no physical form; instead, you’re assigned a unique gift code number that you can use to redeem at online retailers when making purchases. Physical cards remain the most popular kind of gift cards, in part because gift-card givers perceive them as being more in line with social norms than digital cards, according to recent research in Psychology & Marketing.

Companies such as Amazon, Walmart, and Target allow consumers to purchase physical cards as well as to load online or digital accounts. Major restaurant chains, such as Starbucks, Chipotle, and Chili’s, also offer customers digital and physicalgift cards. These cards make it convenient for customers to pay for their drinks and meals using an app or in-establishment card reader to speed up the checkout process.

You can also store codes for digital gift cards inside a mobile wallet app, such as Google Pay, Apple Pay, or PayPal’s Venmo. Then, when you’re ready to check out, you can select your digital gift card as your preferred method of payment.

Federal law prevents gift cards from expiring for up to five years after their activation date, but failing to use a gift card could trigger an inactivity fee.

Pros of Gift Cards

Gift cards can offer a number of advantages. For example:

  • They can be a good substitute form of payment if you’d rather not pay cash or use a credit card.
  • Gift cards can be an appropriate gift for the holidays or for any other special occasion.
  • You can use gift cards to control spending. (This can be helpful for avoiding bank overdrafts).
  • They can be easy and convenient to use.

In terms of gift giving, gift cards might be preferable if you have no idea what to buy for someone, because they allow the recipient to buy what they want, when they want it. Just keep in mind that choosing a closed-loop gift card over an open-loop card can limit the recipient’s options for where they can use the card.

If you’re interested in using gift cards to help kids learn the basics of spending, you may want to research prepaid debit cards for teens. They work similarly but are typically open-loop.

Cons of Gift Cards

Gift cards can also have some downsides. Here are five.

  • After purchases are made with a gift card, there may be a small amount of money left—which, if not used, ends up as money wasted.
  • You may pay purchase or reload fees to add money.
  • Closed-loop cards limit purchasing power.
  • Losing a gift card or having it stolen can be a headache, especially if you have failed to register it or keep the gift card number.
  • You could be charged an inactivity fee if you fail to use your card within one year of the purchase date.

While prepaid gift cards can be stolen or lost, just like a debit card or credit card, the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act offers protections for gift cards issued by retailers and banks.

Prepaid Credit Cards vs. Gift Cards

When weighing the pros and cons of gift cards, it’s important to understand the distinction between them and prepaid debit or credit cards. While you might purchase a gift card to give away, a prepaid credit card is something you might use yourself for everyday spending if you don’t have a bank account or would rather not pay with cash or a regular credit card.

There are several cards offered by prepaid credit card companies that give consumers the ability to buy cards and reload them at retail locations. For example, the PayPal Prepaid MasterCard allows users to easily transfer money between their PayPal account and a physical card that can be used anywhere that MasterCard is accepted. Note, however, that there may be fees involved in using these prepaid cards.

Tip

Consider a secured credit card if you have no credit or poor credit. These cards typically require a small cash deposit, but they can be a stepping-stone for building a credit history.

Prepaid credit cards, debit cards, and reloadable gift cards generally offer better value than retailer-specific gift cards, but regular credit cards can offer some advantages when it comes to earning rewards on purchases or taking advantage of card-specific features, such as travel incentives or rewards bonuses.

Something else to keep in mind when weighing whether to use prepaid credit cards or gift cards for purchases is how they affect your credit score. These types of accounts are not loans, as you’re not borrowing money, so they won’t show up on your credit reports. This means that they don’t help to build your credit history. If you’re looking for a way to establish or improve your credit, a regular credit card can help you do that. Paying on time each month, keeping your balances low, keeping older credit card accounts open, and limiting how often you apply for new credit can help you grow your credit score over time.

Is Giving a Gift Card a Good Present?

A gift card can be a good present for both the recipient and the giver. Sometimes it's hard to choose a gift for someone, and an open-loop card, from Visa or MasterCard, for example, lets the recipient buy what they want. Gift cards can be very convenient to purchase and use. And they can be useful for occasions, such as a wedding, to help the recipient cover costs from a particular retailer.

Why Are Gift Cards Not Accepted?

A gift card may be declined for a variety of reasons. A Visa gift card, for example, may be turned down because the purchase price is greater than the funds available on the card or because it has to be activated before it's used. Or sometimes there may be a waiting period to help thwart gift-card fraud. Check the gift card packaging or your receipt to learn when the card will become usable.

Do Gift Cards Expire?

A consumer protection afforded by the Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act is that a gift card cannot expire until at least five years after its activation date. In addition, a card issuer can't charge an inactivity fee unless there's been no activity on the card for one year and the card spells out clearly the policy regarding that fee.

Can You Buy a Gift Card With a Credit Card?

Yes. Generally, you should be able to purchase any gift card with a credit card. If you have a rewards credit card, one benefit might be that your purchase will earn you rewards, though not all credit cards count gift cards towards rewards. Also before using your credit card for this purpose, check the card's terms and conditions to make sure that the card issuer doesn't treat a gift card purchase as a cash advance.

I Lost My Gift Card. Now What?

You may be able to get a replacement card, which will be an easier task if you have the gift card number. If you have the purchase receipt or the receipt from when the card was activated, check to see if it contains the card number. Or, if you ordered the card from a website, you should be able to access the details of the transaction online. Next, contact the gift card seller, explain what happened and ask if they will issue you a replacement gift card.

To prevent this from happening again, take these steps:

  • Keep your gift cards in a wallet with other credit/debit cards.
  • Record the gift card number (and PIN, if there is one) and keep it safe.
  • Add the gift card to a mobile wallet or gift card app.
  • Photograph the front and back of the gift card.
  • Register the gift card with the company that issued it.
  • Save the activation receipt.

The Bottom Line

A gift card is a type of payment that you can use to make purchases at a variety of locations. Money is loaded onto a card which you or the gift card’s recipient can spend at accepted outlets. Physical cards are still the most popular, though recipients also enjoy the convenience of digital cards. While there are more gift cards now than ever—including multi-store cards, single store cards, and bank-issued cards—the best gift card is probably the one that a recipient will be happy to use.

What Are the Pros and Cons of Gift Cards? (2024)

FAQs

What's the point of gift cards? ›

A gift card is a prepaid card that can be used as an alternative to cash when making purchases. It typically comes with a specific monetary value, allowing the recipient to choose from a range of products or services within the designated amount.

Is it better to give cash or a gift card? ›

While gift cards may have expiration dates or require the recipient to spend a certain amount at once, cash can be used whenever and however the recipient sees fit. Whether they choose to save it for a rainy day or splurge on something special, cash allows for flexibility and spontaneity.

Are gift cards safe to give? ›

While gift cards are a common gift that many people choose to give each other, they are also commonly used by scammers for financial gain. According to the Better Business Bureau, gift card scams increased 50% from 2022 to 2023 with losses from January to September 2023 totaling $147 million.

Do gift cards avoid taxes? ›

Historically, there was a threshold of $25 as the maximum amount one could give before having to be taxed, but that is no longer the case. A gift card is now taxable, regardless of its value amount. The reason is because gift cards are cash equivalents, which are easy to be accounted for and, therefore, taxable.

What gift cards can you use anywhere? ›

The Visa Gift card carries the Visa logo like any other Visa card, so it can be used at the millions of places that accept Visa cards, including online. As with a credit card, when you are ready to pay, simply hand the card to the merchant and sign the purchase receipt.

Why do people give gift cards instead of money? ›

Gift cards also offer a fantastic way to budget for some folks. Cash is easy to lose track of and a cash gift will be spent without a second thought, but when it's a gift card with a certain amount on it, folks tend to make sure they don't exceed the amount by much.

What is an appropriate gift card amount? ›

For co-workers, casual friends and your children's teachers, stay in the $10 to $20 range. Gift cards for close friends and family members can range from $25 to $100. When you're selecting a gift card for a spouse, parent or someone else who's very special, choose a card worth $75 or more.

Are gift cards tracked by IRS? ›

No, gift cards cannot be tracked by the IRS. When it comes to the IRS and gifting, reporting gift cards is done using the honor system. However, if you are not honest about the gifts you are giving, the issue could come up in an audit.

What is the safest store to buy gift cards? ›

The safest place to buy gift cards is typically directly from the retailer or from authorized sellers. Major retailers like Target, Walmart, and Best Buy have systems in place to ensure the security of their gift cards. Additionally, there are sites to buy gift cards online.

Can gift cards be compromised? ›

Gift card fraud refers to using gift cards over cash to commit fraudulent activity. Criminals exploit both gift cards and prepaid cards due to the ease with which they can be manipulated. In some cases, they steal the numbers and security codes off the gift cards in stores and wait for their activation.

How does a gift card go negative? ›

Can the card ever have a negative balance? If a merchant puts through a transaction without prior authorization and funds are not available on the card, you may be liable for the amount greater than your available balance and be required to make payment to cover that amount.

What is one disadvantage of a gift card quizlet? ›

One DISADVANTAGE of receiving a gift card is that the person who received the card often... forgets to carry the card when shopping.

What percentage of people don't use gift cards? ›

At the one year mark, just under 80% of cards are redeemed — and as time passes, they are less and less likely to see the light of day. At any given time, 10% to 19% of gift card balances remain unredeemed — and around 6% of gift cards are never even used.

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