What is a gift card, and how does it work?
Gift cards have revolutionized how people give presents, allowing recipients freedom of choice while saving givers from the anxiety of selecting the perfect gift. These small plastic or digital cards carry monetary value and function similarly to prepaid debit cards but with specific usage parameters. Many consumers purchase billions of dollars worth of gift cards annually, yet few truly grasp how these financial instruments operate behind the scenes.
Gift card basics
A gift card is a prepaid payment card loaded with a specific amount. When someone purchases a gift card, they pay the full value upfront, plus any applicable fees. The card becomes a payment method the recipient can use at designated retailers or restaurants. Gift cards serve as an alternative to cash presents, giving recipients flexibility to choose items they truly want. The concept originated in the 1990s when major retailers began offering these cards as an evolution of paper gift certificates. Unlike their paper predecessors, plastic gift cards proved more durable, easier to process electronically, and less prone to counterfeiting. Digital versions have now emerged, allowing instant email or text message delivery.
Types of gift cards
Gift cards generally fall into two distinct categories, each with different capabilities and restrictions that affect how they can be used:
- Closed-loop cards – work exclusively at specific retailers or restaurant chains. For example, a Starbucks gift card can only be used to purchase items at Starbucks locations. These cards typically carry no additional purchase fees but cannot be used outside their designated merchant network.
- Open-loop cards – Issued by financial institutions or credit card companies (Visa, Mastercard, American Express), these cards can be used anywhere that accepts those payment networks. While offering greater flexibility, these cards often charge activation fees ranging from $3.95 to $7.95.
Some speciality cards exist between these categories, such as mall gift cards that work at any store within a shopping centre or restaurant group cards valid at any establishment within a particular dining company.
Managing your balance
Tracking remaining funds becomes essential for maximizing gift card value. Most retailers print remaining balances on purchase receipts, but consumers should maintain their records. Many consumers regularly check gift card mall balance information through dedicated portals or mobile apps to avoid forgotten funds. Card issuers typically provide toll-free numbers and websites where recipients can verify current balances anytime.
Security features
Modern gift cards incorporate numerous security elements to prevent fraud and unauthorized use:
- Scratch-off PIN covers that reveal codes needed for online or phone purchases
- Unique card numbers and security codes similar to credit cards
- Magnetic stripes or EMV chips that store card data electronically
- Registration options that protect balances if cards are lost or stolen
These measures help protect both the gift giver’s investment and the recipient’s stored value from potential theft or misuse.
Expiration and fees
Federal regulations have standardized certain aspects of gift cards, but essential variations exist. Under the Credit CARD Act of 2009, gift cards cannot expire for at least five years from the issuance date. However, inactivity fees may apply if a card goes unused for 12 consecutive months. Some gift cards, particularly open-loop varieties, may charge monthly maintenance fees that gradually deplete the card’s value over time. Careful attention to terms and conditions helps consumers avoid unexpected charges that diminish their gift’s value.
