Want to know the number one gift adults would like to receive this holiday season? 

Here’s a hint: it fits in the palm of your hand… and sometimes mysteriously disappears.

It’s ... a gift card!

Sales of these credit card-sized “gifts” are expected to decline again this year, mainly due to current economic conditions. Still, they’re predicted to top $20 billion. But whether you’re the giver or the recipient, it’s critical to understand that all gift cards are not alike. The biggest differences are between those issued by stores and those issued by banks. The latter typically come with a “VISA,” MasterCard,” or “American Express” logo.

The National Retail Federation [NRF] points out that gift cards from “most national retailers do not have fees or expiration dates associated with them.” The downside, of course, is that the value of the card can only be spent at that particular store.

Bank-issued gift cards are accepted virtually anywhere. However, they’re the most expensive to both give and receive. “Gift cards issued by banks, malls, and credit card companies are more likely to add expiration dates and tack on annoying activation, maintenance, inactivity and transaction fees,” says NRF. These fees are automatically deducted from the balance left on the card, quietly and steadily eroding its value. According to NRF, “some bank-issued gift cards even charge a fee for simply checking the balance.”

Although American Express (AXP) recently announced it is eliminating its monthly charge on gift cards, VISA (V) and MasterCard (MA) have yet to follow suit.  (Starting next August gift card issuers are prohibited form charging a monthly fee if the card has been used in the past 12 months.)

Despite publicity about the costs associated with so-called “general purpose” gift cards, most consumers are unaware of the problem.  According to a survey commissioned by the Consumer Federation of America [CFA], less than half of those polled were aware that certain gift cards start charging a monthly fee six to twelve months after they are issued.

“I was surprised so few consumers understood that these gift cards cost money,” says Stephen Brobek, CFA’s executive director. “And, that expense includes an initial charge and, for some, monthly fees that kick in after a period of time.”

Another big difference between store-issued and bank-issued gift cards involves “split payments,” i.e. using a combination of gift card and cash to cover the cost of an item. It’s not a problem with store cards.  It’s a big drawback to bank-issued cards.

Most retailers will not accept a bank-issued gift card as payment unless there is enough money left on the card to cover the entire purchase. That makes it impossible to use up every cent on your card. What are you supposed to do with a balance of, say, $4.26? As a result, Brobeck says most people end up not spending about 10% of the value of their gift card.

According to Brobeck, American Express “has been working with retail chains to persuade them to accept a split payment,” that is, part gift card, part cash. So far, he says, some major drug store chains have agreed to this.

When you factor in the fees that reduce what the card is worth, Brobeck estimates that “consumers end up receiving two-third of the value of their cards.”

Guess who keeps the rest?  Ka-ching.

If you plan to purchase gift cards as presents this holiday, Brobeck says be sure to read the fine print. “And pay particular attention to any expenses and expiration dates.” He cites instances where consumers bought “old” gift cards that had been on display for several months. As a result, the fine print on the back (if you can read it) revealed there was less than a year left before they were to expire! (The new law mandates that a gift card must be good for at least 5 years.)

And if you are the recipient of a gift card? “Use it quickly,” advises Brobeck. “Spend it within a month or two and no more than six months. You’re more likely to spend the full value and avoid the monthly fees” some cards charge.

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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