Giving a gift card? Don’t add fees under the tree

NEW YORK — Gift cards are an easy way to ward off disappointment during the holidays.

In the best case scenarios, they give our loved ones the freedom to buy whatever it is they really want and alleviate the stress of trying to find the perfect gifts. But that doesn’t mean they’re always a slam-dunk.

The surprising number of fees and earlier-than-expected expiration dates on some gift cards were enough of an issue to prompt new regulations last year. For example, monthly inactivity fees in the past may have drained funds before consumers had a fair chance to use them.

The changes are expected to help dramatically reduce the amount consumers lose on gift cards. Yet an estimated $1.9 billion is nevertheless expected to go unused this year, according to TowerGroup, a consulting firm.

The problem is that fees and expiration dates aren’t the only way consumers can lose the money. There’s also confusion about the different types of gift cards on the market, some of which are entirely exempt from the new regulations.

Whether you give or receive a gift card, here’s what you should know:

What the regulations cover

To start, it’s a good idea to know the consumer protections that come with a gift card.

Under the rules that took effect last summer, gift cards can’t expire for at least five years. Monthly service and inactivity fees are also banned in the first year and only one such fee a month is allowed after that.

The rules were included as part of sweeping credit card reforms and should go a long way toward reducing many of the “junk fees” in the industry, notes Brian Riley, a senior researcher at TowerGroup.

But there are several important exceptions to note.

For example, the gift cards many retailers offer either as incentives or rebates with big purchases are exempt from the rules. You may also be considering redeeming your credit card rewards for gift cards to pass out during the holidays. But those gift cards aren’t subject to the new regulations either.

“Any type of gift card that you don’t purchase outright, you’re going to run into expiration dates and fees,” says Michelle Jun, a senior attorney at Consumers Union. This is because such cards are viewed as discounts or “extras”.

As a result, Jun notes that rebate and incentive gift cards often expire as quickly as three months.

When to check the terms twice

The gift cards issued by major retailers are fairly straightforward; you load a set amount onto the card and the recipient generally isn’t subject to any fees.

The terms become more complicated with bank-issued gift cards, which bear an American Express, MasterCard or Visa logo. The upside of these cards is that they provide more flexibility, but they’re also more likely to come with fees that you’ll need to review carefully.

Gift cards from American Express, Chase and Wells Fargo, for example, charge purchase fees of around $3 to $7. That’s on top of the money you want to add to the card.

Chase charges an inactivity fee of $2.50 a month if the card isn’t used for a year. Wells Fargo stopped charging inactivity fees on cards issued after August 2010.

American Express last year did away with inactivity fees and expiration dates.

The fine print may contain other details that may sway your decision on which card to buy. Chase, for example, eliminated its $12 fee to replace lost or stolen cards, but Wells Fargo still charges $7.50 for the service.

There may be incentives to consider too; Chase’s premier checking account customers, for example, don’t have to pay the purchase fee for the bank’s gift cards.

It’s also worth noting that bank-issued gift cards aren’t subject to the stricter laws that some states enforce. So even if you live in New York, where expiration dates are banned altogether, a bank gift card could still expire after five years.

Wells Fargo notes that the underlying value on its cards do not expire — consumers can request a replacement card when the card expires at no charge.

Other ways cards can lose value

Unlike debit and credit cards, consumers aren’t given any guaranteed legal protections if a gift card is lost or stolen.

So if it’s an option, go online and immediately register any gift cards you receive whether they’re from a store or bank. If you’re planning on buying a gift card as a present e-gift cards can greatly reduce the chances for loss or theft, notes Riley of TowerGroup. This is because the code for the gift card is sent in an email to the recipient.

Another possibility to consider in this economic climate is that a retailer will simply go out of business. Retailers that stay open as they reorganize under Chapter 11 bankruptcy may still honor gift cards. That’s what Borders did early this before it liquidated and closed its doors.

But companies can also choose to suspend the acceptance of gift cards, which are treated as loans to the company by the bankruptcy court.

To recoup the value on the card in that scenario, you’d have to file as a creditor to the bankruptcy proceedings. Even if you decide to go through the trouble, it’s a process that could take months or even years to resolve. And it probably won’t end with you recovering the full value of the card anyway.

So if you receive a gift card for the holidays this year, make it a point to use it as soon as possible. This reduces the chances that you won’t get its full value, whether it’s because of loss, theft, inactivity fees or other circumstances.