Gift cards are convenient and easy to use, but they also have drawbacks you should consider before getting one.
Gift cards can be a lifesaver on special occasions when you don’t have the time or inspiration to find the perfect gift for someone you care about. They can even come in handy for purchases you want to make yourself.
With that said, the question remains: Should you get a gift card or not? Before you make a decision, it’s important to understand how gift cards work and what their advantages and disadvantages are.
How do gift cards work?
A gift card, also known as a gift certificate, gift voucher, or gift token, is a form of store credit that you can use to make physical or online purchases.
You can either load a specific amount of money onto the card, which you can spend at accepted stores, or purchase a gift card with a predetermined amount.
Gift cards fall into two categories, which determine where and how you can use them:
- Open-loop gift cards: These cards can be used to make purchases from any retailer that accepts payments through the card’s operating network (e.g., Visa, MasterCard, American Express, or Discover). For instance, open-loop cards branded with the MasterCard logo can be used anywhere that accepts MasterCard payments.
- Closed-loop gift cards: These gift cards can only be used at specific locations, such as a particular store or group of stores.
Physical vs. digital gift cards
Nowadays, most companies offer both physical and digital gift cards. Unlike a physical gift card, a digital gift card (or e-gift card) is registered electronically. Digital gift cards come with a unique gift code number that you use when you make purchases at online stores.
Digital gift cards allow you to pay for purchases with an app or card reader. Many mobile wallet apps, including PayPal, Google Pay, Venmo, and Apple Pay, even allow you to store codes for digital gift cards.
Pros of gift cards
Gift cards undoubtedly have many benefits. Here are just a few examples:
- Often free to purchase: Getting free gift cards online can be as easy as taking paid online surveys and using a cashback app. In many cases, you can purchase gift cards without any added fees.
- Good substitute for cash and credit cards: Gift cards are a good alternative to cash and credit cards. You won’t have to carry a lot of money on you, nor will you need to worry about overdraft fees.
- More freedom for the recipient: These cards take the guesswork out of giving gifts. The recipient can buy goods or services they genuinely want at a time that’s convenient for them, and they’ll have 5+ years to redeem it, depending on the card.
- Lower risk of gift returns or exchanges: Finding a gift that perfectly suits someone else’s tastes can be tricky. By giving someone a gift card as a present, you lower the risk that you’ll guess wrong and the recipient will want to return or exchange your gift.
- Easy and convenient to use: Most people know how to use a gift card, and they’re a convenient way to make purchases for people of all ages.
Cons of gift cards
Despite their rising popularity, gift cards have certain disadvantages. Here are a few drawbacks of gift cards:
- Additional fees: In some cases, card issuers may charge inactivity fees if the cardholder fails to use their gift card for one year or more. The card may also come with purchase or reloading fees.
- Risk that the gift card won’t cover the full purchase amount: The amount that you load onto a gift card might not be enough for the recipient to purchase the gift they want. In this case, they’ll need to pay out of pocket to cover the leftover costs.
- Risk of wasted funds: If there’s any money left over on a gift card after it’s been used to make a purchase, there’s a risk that the funds will go unused. This means some of your money will be wasted.
- May seem impersonal: While giving someone a gift card so that they can pick out their own gift gives them freedom of choice, it may seem like an impersonal gift to some.
Gift cards vs. prepaid cards
Gift cards aren’t quite the same as prepaid cards (also known as prepaid debit cards or stored-value cards). Before getting a gift card, it’s important to understand how these two types of cards differ so that you make the right choice.
Below are the key differences between standard gift cards and prepaid cards:
- Option to reload and reuse: Gift cards can typically only be used for purchases up to the monetary amount specified on the card. By contrast, prepaid cards can be used indefinitely, as long as you keep adding money to the card.
- Costs and fees: Prepaid cards may come with fees for activating, reloading, and using the card as well as for checking your balance and withdrawing money from an ATM. Gift cards don’t have all of these functionalities and don’t usually have quite as many fees.
Another thing to bear in mind is that neither gift cards nor prepaid cards are classed as credit accounts. This means they won’t show up on your credit report or help you build credit.
If you want a card that will improve your credit score or help you rebuild damaged credit, then you’re better off getting a credit card (such as a secured credit card) and using the account responsibly.
Takeaway: Whether or not you should get a gift card depends on the situation.
- Gift cards fall into two categories: closed-loop gift cards (for use only with select retailers) and open-loop gift cards (no restrictions on where they can be used).
- Gift cards can be physical or digital. Digital gift cards come with a gift code number for purchasing purposes.
- Benefits of gift cards include the option to purchase for free, no need for cash or credit cards, their ease of use, and the freedom of choice for the recipient.
- Disadvantages of gift cards include potential fees, the risk of wasted funds, and the risk that the recipient will perceive the gift card as an impersonal gift.
- Prepaid cards differ from standard gift cards in that they can be repeatedly reloaded. However, unlike credit cards, neither gift cards nor prepaid cards help build credit.
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