Looking a gift card in the mouth

Your gift this holiday season may stop giving — if it’s a gift card.

The popular numbered plastic rectangles can lose some or all of their value, either through monthly maintenance fees, expiration dates, theft, or when the issuer files for bankruptcy. According to some leading consumer advocates, the risks now outweigh the benefits.

“We’re not big fans of gift cards for a bunch of reasons, and a new one this holiday season is all the retailers that seem to be poised to go out of business,” said Greg Dougherty, executive editor of Consumer Reports magazine.

“Typically, if a retailer goes bankrupt, you’re just another creditor somewhere in that line, and it can be a long line and it can be a long time to get your money back — if you ever do.”

When electronics retailer Sharper Image filed for bankruptcy in February, it stuck patrons with $20 million in outstanding gift cards. This month, Circuit City followed suit.

“They have indicated that they would like to continue to honor their gift cards,” Dougherty said. “But they’re not entirely in control of their own fate.”

This year, $120 million in gift cards will be rendered worthless by bankruptcy alone, according to projections by the Massachusetts-based TowerGroup financial research firm. And no law prevents retailers from continuing to sell gift cards after entering bankruptcy.

“The cards are backed by the good faith of the company, but there’s no assurance,” said Dougherty. “And it’s very difficult, certainly for the average person, to know whether a company is stable or not.

“You could watch the headlines and try to know, but even the analysts get it wrong sometimes.”

Even before the economic downturn, gift cards were more problematic than their popularity suggests. (This year, consumers are expected to buy $94 billion worth, according to TowerGroup.) This is primarily because most expire within three years, some within one.

“I’ve got them all over the place,” said Bill Botos, a Las Vegas truck driving instructor who never seems to get around to using cards while they’re good.

“There’s a $50 Outback gift card in my house somewhere in a box,” he said, “a J.C. Penney’s gift card.”

Botos also remembers receiving a card for merchandise at Sam Goody’s, the defunct record chain, several years back.

“I guess that’s no good anymore,” he said, laughing.

According to a recent poll of Consumer Reports readers, 25 percent still had gift cards from last holiday season; 50 percent of those had two or more. (The most-cited reasons: 54 percent said they had no time to use them, 35 percent said they couldn’t find anything they wanted in the store.)

“You give somebody a gift card for the holidays, you’re putting another burden in their lives,” Dougherty said.

Companies quite literally bank on this burden. According to TowerGroup, 10 percent of gift cards are never redeemed in their entirety. That means that retailers could make as much as $9.4 billion off gift cards this year alone.

Maintenance fees are another profit generator for gift-card issuers.

“Every month you don’t use the card, your balance goes down,” Dougherty said. “So you show up to the cash register and you think the thing’s worth $100, and it turns out it’s worth $80 or $40.”

Most retailers have ditched the fees, although bank-issued (credit card) gift cards still typically charge about $1.50 per month. (That’s because bank cards enjoy the advantage of being guaranteed by the Federal Deposit Insurance Corporation, according to Dougherty.) In 2005, Nevada passed a law prohibiting these fees within one year of activation. The same law prohibits expiration dates that aren’t either clearly stated, in 10-point type, or accompanied by a phone number to call.

“The onus is also on the consumer to understand what they’re purchasing,” said Nevada Department of Consumer Affairs Commissioner James Campos. “You have to read it first. Unfortunately, you can’t assume anything. And if there’s just a number, you have to call it.”

Campos also cautions consumers about security issues.

“A lot of times, these cards are sold on the counter, and a clever thief can go up and actually take money off those cards,” he said, explaining that they either jot the number down and use it online, or grab the electronic code with a scanner and preprogram a card that they paid less for.

“Or they make their own card,” Campos said. “It all depends on how sophisticated they are.”

Campos couldn’t say exactly how many gift-card theft complaints his agency received this year, blaming a computer database problem.

“But it happens a lot,” he said.

Dougherty suggests buying cards with scratch-off PIN codes on the packaging, to at least prevent online abuse.

And if you receive a card this holiday season, Dougherty said, “our advice is to get to the store and use it as soon as practical.”

He added: “And spend the whole thing.”

Contact reporter Corey Levitan at clevitan@reviewjournal.com or 702-383-0456.

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