How They Work, Pros, and Cons

Gift cards are a popular and convenient way to give a gift for any occasion, such as birthdays, anniversaries, holidays, and graduations. With their flexibility and ease, they can make gifting a simpler process.

Despite their convenience, however, it’s important to understand how they work—especially when it comes to making purchases—how they compare with other cards, and how to avoid pitfalls that come with their use.

How Gift Cards Work

A gift card is simply a type of prepaid card with a set value that can be used to make purchases at a specific retailer.

You buy a gift card, determine the amount added to it, and present it to a recipient who can then use it as they would any other payment method. (Of course, you can buy a gift card and use it yourself.)

Most stores allow you to use their gift cards in their brick-and-mortar locations and online at their websites. While the process is straightforward and similar to that of cash or a credit/debit card, there may be restrictions on some cards.

Cards come with instructions about:

• How to redeem their value
• Whether there’s an expiration date for use
• Whether they can be used only at specific locations
• If there are activation requirements or special conditions for using them

Different types of gift cards will have their own set of rules. Knowing the types and their specific details can help you make the most of them.

Types of Gift Cards

Closed-Loop Gift Cards

Closed-loop gift cards are the most common type of gift card. They can only be used within a retailer’s specific sphere.

For example, an Amazon gift card can only be used to make purchases on Amazon. A Barnes & Noble gift card can only be used in its physical bookstores or on its website.

Closed-loop gift cards are great when you know the recipient’s interests or favorite stores.

Open-Loop Gift Cards

Open-loop gift cards are a lot more flexible than closed-loop cards. They function like regular credit or debit cards and can be used where major cards are accepted.

To use them, you first load them with a value, such as $20, $50, $100, or whatever amount you choose, and then swipe them at checkout.

They’re great for use almost anywhere, such as at gas stations, restaurants, shops, and movie theaters. However, they may come with activation fees or transaction charges, so it’s important to read the fine print.

Physical Gift Cards

Physical gift cards are cards you can hold, often with a magnetic strip like most standard cards, and made of plastic or metal.

You can use these in stores and online as you would other types of gift cards. They can be bought in physical stores or online.

Physical gift cards work well as gifts because the recipient can actually hold them and use them in physical locations.

The only downside is that they can be lost, which often means the value on the card is forfeited, as they can be difficult to replace without proof of purchase.

Digital Gift Cards

Digital gift cards come in electronic form, often in an email or on a retailer’s app. You can use them by entering the card number or PIN at the retailer’s website or by scanning the barcode on your phone in the store.

Digital gift cards are great when you’re not physically near the recipient of your gift, and are easy to gift at the last minute.

They’re also easier to keep track of as they won’t get lost, and they’re better for the environment as no actual card is created.

How to Redeem Gift Cards

There are a few ways you can redeem gift cards, depending on their type.

• In-store purchases: If you have a physical gift card, you can present it at checkout, where you’ll swipe it like a credit/debit card, and the value of your purchase will be deducted from the balance.
• Online stores: Most gift cards you receive, whether physical or digital, can be used at online stores. You’ll generally just punch in the card number and PIN, or hit a button that deducts payment from the digital card.
• Exchange for cash: Some retailers may allow you to transfer the balance on your card to cash. This often depends on the specific retailer and various restrictions, as cash can be used anywhere, and the retailer may want you to keep spending the balance in their store. You can also sell gift cards online and receive cash, though you’ll generally receive a little less than the card value.

Pros and Cons of Gift Cards

Pros

Gift cards come with a lot of advantages for both the giver and the recipient. For the giver, they’re an easy gift option, without the need for stress or thought of selecting a gift. There are no issues with selecting a bad gift or the wrong size or color.

If you need a last-minute gift, they can be obtained quickly. And sometimes, they come with bonuses, such as buy $50 and get an extra $5 on the card. They’re easy to buy, handle, and send to the recipient.

The recipient of a gift card receives a gift and can use it to purchase something of their choosing. They can splurge on an item they’ve been wanting but were hesitant to spend on.

This tends to be more desirable than being stuck with a gift you don’t actually want and can’t return.

Cons

Despite their benefits, not all gift cards are ideal. They’re often limited to a specific retailer, so purchase options can be limited. They may also come with hidden fees, such as activation fees or transaction fees, that reduce the value of the card.

Some cards also come with expiration dates that limit when you can use them. If they expire, then you lose the financial gift. Note that federal rules have been put in place to limit card fees and expiration dates.

Lastly, if you lose a gift card, it can be difficult to replace if you don’t have proof of purchase (so be sure to keep gift card receipts). Or similarly, if the retailer goes out of business, you’re stuck with a useless card.

Gift Cards vs. Prepaid Cards

While similar, gift cards and prepaid cards have distinct differences. Gift cards are generally single-use cards. There’s one balance on them, and when that is depleted, the card is done. They’re also usually tied to a specific retailer (closed-loop) or payment network (open-loop) and intended as a gift.

Prepaid cards, on the other hand, are intended as a budgeting and spending tool rather than a gift. They are a lot more flexible prepayment- and usage-wise. Money can be added at any time without limit, and they can be used anywhere credit or debit cards are accepted.

Beware of Scams

As with all types of monetary cards, scammers are looking to take advantage of people and steal their cards. Here are a few different scams to be aware of.

• Online auction scams: Sellers on online auction websites may be selling an item that doesn’t exist, often asking for payment via gift cards.
• Bot scams: Automated bots can scrape gift card numbers and use the funds as soon as the card is activated. They also may trick users into buying gift cards for products or services that don’t exist.
• Fake cash prize scams: Scammers will call or email saying you’ve won a gift but need to pay taxes or fees using gift cards before you can claim it.
• Fake tech support scams: Some people pose as tech support agents, convincing consumers to purchase gift cards as a way to fix tech problems, most of which don’t even exist.

Protect Yourself

As with all dealings involving money, proceed with caution. Don’t provide strangers with your important information, such as card numbers (or social security number, bank account number, etc.). Be vigilant, especially if someone unknown reaches out to you for information (rather than you reaching out for assistance).

Try to verify the source of contact and if you can’t, stop the communication. Most legitimate businesses, organizations, and government agencies will never ask for payment via a gift card.

The Bottom Line

Gift cards can be a thoughtful and hassle-free gift, offering flexibility and convenience to both the buyer and the recipient.

To get the most out of gift cards and to avoid losing their value, it’s important to know how they work and what fees or limitations may apply.

Whether you’re receiving or giving, get to know the ins and outs of your gift card so you can use it to its maximum potential and avoid common pitfalls, particularly the scams that consumers often experience.