Why gift cards shouldn't top your holiday shopping list

New regulations over the last few years have made gift cards safer than ever. That's one reason why more people are choosing to give a gift card instead of say, cash or a check. But giving a gift card comes with so many drawbacks that we don't recommend it. Even so, holiday spending on plastic and digital gift cards will hit a new record, with the average person projected to spend $174 on gifts cards, up from about $163 last year, according to a national survey by the National Retail Federation.

And it's not just about giving. In an earlier NRF survey, 62 percent of shoppers said that they would like to receive a gift card, making gift cards the most-requested noncash gift eight years in a row. (The NRF survey did not include cash or check as a choice).

Among the positive changes to regulations is that funds loaded onto gift cards cannot expire within five years after being purchased or new money loaded. That change is largely responsible for a big decrease in the value of gift cards that go unused, down from more than $8 billion to less than $1 billion this year, predicts CEB, a business-advisory company that tracks the gift card industry.

But $1 billion still is a lot of money. And while more people are giving gift cards over the holidays, there are many drawbacks that illustrate why these should not be on the top of your holiday gift list.

Pitfalls of gift cards

Purchase fees. Issuers can charge fees for the purchase of a gift card, which is common for bank cards, those that can be used at most merchants that display that credit card logo that appears on the card. For example, you'll pay $3.95 for American Express Original Gold gift card and $4.95 for the First Bank MasterCard Gift Card

Dormancy fees. Issuers are allowed to begin charging so-called dormancy fees beginning in the 13th month after a card was last used or there was other activity, such as the cardholder added more money. Such fees are common for bank-issued cards. For instance, TD Bank, which promotes itself as American's most convenient bank, charges a very inconvenient fee of $2.50 a month if there's more than year of inactivity on its TD Bank Visa Gift Card.

Replacement impossible or costly. Issuers are not required to replace lost of stolen cards, something that's common with merchant issued cards, such as those issued by Crabtree & Evelyn, Southwest airlines, and the eyeglass retailer Warby Parker. Some issuers charge a replacement fee, especially for bank cards. For example, you'd pay $15 to replace a lost Simon Visa or American Express gift card.

Looking for a traditional gift? Check out our holiday gift ideas and guide.

No protection for disputed purchases. Unlike with purchases made with credit cards and, to a lesser extent, debit cards, there's no right to dispute purchases made with gift cards, even if there's an error or fraud.

Funds not protected. Despite losses incurred by consumers who had gift cards for the bankrupt retailers Sharper Image, Linens 'n Things, and CompUSA, issuers still are not required to segregate gift funds into reserve accounts in case they go belly-up, as CEB noted in its 2013 report. So a retailer bankruptcy could leave you holding worthless plastic. Even if the retailer remains in business under bankruptcy reorganization, the closing of some of its stores could make redeeming its gift cards difficult.

Limited acceptance. While bank-issued cards generally are widely accepted, retailer cards typically can be used only at the merchants that issued them. That's a problem if your gift recipients doesn't shop at those merchants or can't find anything they want, at least not without adding their own money. And merchant cards generally can't be redeemed for cash, even if your gift recipient desperately needs the money help pay bills, for example. (Bank-issued cards often can be redeemed, but for a fee.)

What to do

Think of a gift card as cash with lots of strings attached. If you can't come up with a traditional gift, skip all the hoops and just give a check or cash, which can be used anywhere.

If you must give a gift card, check the terms and conditions so you don't saddle your gift recipient with something onerous, such as a card that can't be replaced if lost or stolen. And include the receipt, which often is needed to replace cards that have been lost, stolen, or destroyed, when replacement is even an option.

If you receive a gift card, consder reviewing both the federal and state gift card rules governing give cardscheck the terms and conditions. Some cards must be activated or registered to be used or replaced. Save the receipt and card number separately from the card in case you need to replace a lost or stolen card. Finally, use those gift cards as soon as possible to avoid losing them, incurring dormancy fees, or having them become worthless because the retailer did a disappearing act or mismanaged the money.

If after using the card you end up with a small balance of a few dollars or less, try using a so-called split-tender transaction to spend the rest. In such a transaction, you'll pay for part of the purchase with the gift card balance and the remainder with another form of payment, such as cash or credit card. Some merchants don't allow split-tender transactions, especially on their websites. But many do.

—Anthony Giorgianni