Gift cards are safer, but pitfalls remain

There's a good chance this holiday you'll either buy a gift card or receive one.

Consumers are expected to spend more than $50 billion on gift cards this year, and most are sold around the holidays. (Nothing says, "I care enough to buy you something, but I have no idea what you want and I'm running out of time" better than a gift card.)

The majority of gift cards have abandoned the most egregious practices - hidden fees and early expiration dates - that outraged consumers for years.

In August, federal law will add further protections: Cards can no longer expire within five years and won't be able to charge an inactivity or service fee if the card has been used in the previous 12 months.

Yet for this holiday season, some cards still retain traps, so if you're buying a card make sure you check out the terms. And if you get a card you don't like or need, don't worry. Several gift-card exchange sites, including GiftCardRescue.com in Maryland, allow you to get cash for your card or swap it for one you really want.

There are two types of cards: store cards and general purpose cards.

Store cards generally don't charge fees or expire. Store cards also allow you to split payments, by using the card for part of a purchase and paying the rest by cash or other payment method, says Stephen Brobeck, executive director of the Consumer Federation of America.

A drawback is that the card can be used only at the specific retailer, so you need to make sure the recipient shops there before buying it.

"You want to make sure the company is financially healthy," adds Evan Johnson, administrator at Montgomery County's office of consumer protection. If a retailer goes bankrupt it may no longer honor gift cards, and you could end up as a creditor and get only pennies on the dollar if you make a claim in court, he says.

Store cards remain the most popular, but the sale of general purpose or bank cards is growing. These cards can be used at most stores so you're not stuck with a single retailer. But they may expire, say, after one to three years of purchase. And they can carry steep fees.

You might have to pay a fee of up to $6.95 just to buy a general purchase card, according to a recent survey by the Consumer Federation. On top of that, the cards may assess a monthly fee as high as $4.95 that kicks in after six to 12 months of purchase. "That reduces the value of the card until ultimately the value disappears," Brobeck says.

American Express announced in late September that it eliminated on new and old cards a $2 monthly fee that kicked in after 12 months. This could have a significant impact for consumers if competitors feel the pressure to eliminate their fees, too, Johnson says.

Besides fees, another drawback with general-purpose cards is that you can't always split payment, making it harder to use up the entire card value, Brobeck said.

No matter what type of gift card you receive, play it safe and spend the full amount within six months, Brobeck suggests. That way you can avoid fees and are less likely to forget to use the card.

Though consumers like the convenience of giving gift cards, they aren't always crazy about receiving the cards. A recent Consumer Reports survey of 1,000 adults found that nearly half intend to buy a gift card this holiday, but only 15 percent wanted to get one.

Indeed, a big problem with gift cards is that recipients never use them or only spend part of the money. An estimated 10 percent of the value of gift cards - more than $5 billion this year - will go unspent. That's money thrown away.

People for years have traded gift cards on eBay and Craigslist, but you run the risk that card is not as advertised.

Enter gift card exchanges, online sites that allow you to get cash for your unwanted card or trade it in for another.

Kwame Kuadey, an MBA graduate from Johns Hopkins University, founded GiftCardRescue.com in Ellicott City last year. His site buys 150 or so types of store cards for 65 percent to 80 percent of their value, depending on demand.

This year movie theater gift cards, seen now as a luxury, and specialty retailers, such as Ann Taylor, aren't selling as well and receive a lower price, he says. But mass merchandisers, such as Walmart, Target, and general purpose cards are hot. "Those cards fly off the shelf," he says.