What Is a Gift Card?
Let me tell you directly: a gift card is essentially a prepaid debit card loaded with a specific amount of money that you can use for various purchases. If it's a store gift card, it's meant for use at particular merchants or retailers, but general-use prepaid gift cards aren't tied to any one merchant and can even let you withdraw cash from ATMs.
How a Gift Card Works
You should know that gift cards function as prepaid debit cards loaded with funds for later use, and there are two main types: open-loop and closed-loop, both of which you can typically use online or in person.
Many of these cards, often called stored value cards, come with minimum and maximum initial loading amounts, say from $10 to $500. In some cases, you can use them to cover part of a purchase and pay the rest with cash, debit, or credit. To protect against loss, registering them online lets you track and freeze the balance if the card goes missing, making some gift cards safer than carrying cash.
Keep in mind that depending on the card, you might face a reload fee each time you add money.
Closed-Loop Gift Cards
Closed-loop gift cards are those marketed by specific stores, allowing you to buy anything from that retailer only, usually just at their store or website. However, if a company owns multiple brands, like Gap Inc. with Gap, Banana Republic, Old Navy, and Athleta, their cards might work across all of them.
These cards typically don't have activation fees and won't show a payment processor's logo, but they do feature the merchant's logo, basically serving as store advertising. They're usually not reloadable, so once the balance is zero, they're done. Funds might expire after a set period, so you have to use them within that time. They're common for wedding or baby registries, and some merchants give them as bonuses for signing up.
Open-Loop Gift Cards
Open-loop gift cards act like cash or a standard credit/debit card, usable at any merchant that accepts that card type, including online. Major issuers like American Express, Visa, Discover, and MasterCard provide these, displaying their logo and enabling all sorts of electronic payments almost anywhere.
They also work as regular prepaid cards and are often reloadable, so you can add funds yourself. Be aware that they sometimes require an activation fee, around $5, paid at purchase.
Digital Gift Cards
Gift cards first appeared in 1994, and now more merchants are offering digital versions to encourage spending, like bonus cards from stores such as Saks Fifth Avenue or Bergdorf Goodman for loyalty members who hit spending thresholds. Still, according to surveys, 75% of redemptions are physical cards versus 25% digital.
Gift Card Scams
Scammers are increasingly targeting gift cards, with consumers reporting $148 million in losses from scams in the first nine months of 2021, per the FTC. These often involve scammers convincing people to buy gift cards for supposed payments, then stealing the card numbers to drain the funds.
Another tactic is tampering with physical cards in stores to get the numbers, so when you load money, they steal it. Target cards were hit hard, accounting for $35 million in losses. To protect yourself, avoid cards that look damaged or tampered with, and only use them for payments to people you know and trust.
Frequently Asked Questions
What is a gift card? It's a prepaid card for purchases and financial transactions, either open-loop for wide use or closed-loop for specific places.
Can I use a gift card to withdraw cash at an ATM? Yes, if the card permits it, usually only with open-loop cards not tied to a specific store.
Do gift cards expire or have fees? Some might expire if unused within a time frame, and you could face activation, reload, monthly, or dormant-account fees depending on the card.
The Bottom Line
Gift cards are practical for online or in-store shopping; you might buy them as gifts or earn them as rewards from merchants. Understand how they work and where they're usable to avoid fees or expiration risks. Also, watch out for scams, especially during holidays when more people are involved with them.
Key Takeaways
- A gift card is a prepaid debit card loaded with a specific amount for purchases and transactions.
- Closed-loop cards are for specific retailers, while open-loop cards work at more places.
- Some allow ATM cash withdrawals.
- Closed-loop cards are usually not reloadable.
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