7 Things to Know About Buying Gift Cards

Just look at how the mighty have fallen. Sales of gift cards -- typically the most-requested holiday gift – have fallen dramatically this holiday shopping season as budget-crunched consumers hunt for ways to save.

“Consumers are putting all their focus into finding bargains,” says Daniel Horne, an associate professor of marketing at Providence College in Rhode Island. Instead of going straight to the cash register to buy a $25 gift card, a shopper is more prone to spend $20 on an item marked down from $25, he explains. Add to that concerns about the growing number of retailers that are going out of business and gift cards become even less of an attractive option for shoppers.

As a result, gift card sales are expected to fall 6% this holiday season to $24.9 billion, according to the National Retail Federation. (Over the four-day Black Friday weekend, gift card sales were down 10%, with just one in five shoppers buying one).

Yet, shoppers don’t have to abandon gift cards altogether -- especially when the alternative is taking a blind guess at what someone on your shopping list really wants. Just proceed with caution. Here's what you need to know to guarantee that buying a gift card will be worthwhile.

Steer clear of troubled retailers

Avoid buying a gift card from a retailer that has filed for bankruptcy protection, or may do so soon, warns Sally Greenberg, executive director of the National Consumer League, a consumer advocate. While stores in Chapter 11 may continue to sell and accept gift cards, they can also put restrictions on their use. Sharper Image, which filed for Chapter 11 bankruptcy protection in February, stopped accepting cards temporarily, then required shoppers to make purchases worth at least double the value of their gift cards. Linens ‘N Things, which filed for bankruptcy protection in May, will only accept cards in its store during its liquidation.

If a retailer files for Chapter 7 bankruptcy protection -- which liquidates the company rather than allowing it to reorganize -- the card balance is almost certainly a lost cause, says Greenberg. “You’re in a long line behind other unsecured creditors,” she says. Most claims return just pennies on the dollar, if anything at all.

Look for FDIC coverage

Your safest bet is to buy a gift card issued by a bank, says Gwenn Bézard, research director for Aite Group, an independent financial services market research company. In mid-November, the FDIC expanded its coverage of consumers’ assets at insured financial institutions to include prepaid gift cards. Should the bank go under, the card balance is covered up to $250,000.

Weigh the fees

Although they offer better protections than store gift cards, bank-issued gift cards do have one pitfall: purchase fees. Discover (DFS: 9.43*, -0.54, -5.41%) and American Express (AXP: 20.43*, -0.33, -1.58%) both charge $3.95 per card, for example, and Chase (JPM: 28.16*, -0.37, -1.29%) charges $3.50. U.S. Bank (USB: 25.80*, +0.03, +0.11%) charges $3.95 if you buy at a bank branch, or $6.95 plus shipping when you purchase one online. Skip these cards if the charges are more than 10% of the balance, says Greenberg. Fees that high aren’t a good deal for the giver or the receiver.

Swap out unused cards

Still hanging on to unwanted cards from last year? Sell or trade them before any dormancy fees kick in. Gadget and home goods retailer Brookstone is letting consumers exchange gift cards of any value (even a penny) from any other retailer for a 15% in-store discount. And on gift card swap sites such as CardAvenue.com and SwapAGift.com, users often receive bids just a few dollars below the face value of their cards.

Take advantage of promotions

To entice consumers to spend more, many retailers are offering discounts with a gift card purchase. Papa John’s offers a free medium one-topping pizza ($10 value) with every $25 card purchased. Through Dec. 8, chain B.R. Guest Restaurants is offering 20% off gift cards purchased online.

Wait until the last minute

Plenty of gift cards carry expiration dates and some even have maintenance fees that kick in after as little as six months of inactivity. To help give your recipients a little more time on the clock -- nearly half of consumers still haven't redeemed the gift cards they received over the holidays by the end of January, says Bézard -- save your gift card purchase until the last minute.

Spend in January

Fewer gift card purchases now mean fewer shoppers redeeming them in January, which could pose a problem for cash-strapped retailers looking to extend their holiday season profits into the new year. Postholiday, retailers may start extending discounts to shoppers who use gift cards, says Horne. (Last year, both Best Buy (BBY: 20.03*, +0.08, +0.40%) and clothing retailer New York & Company offered such incentives.) American Express also routinely extends special discounts for using its cards at participating retailers, such as 15% off a purchase of $75 or more at Virgin Megastore.