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Are gift cards the way to go?

Before you buy one for your friend or family member this holiday season, be sure to read the fine print. “Today” financial editor Jean Chatzky offers some advice.
/ Source: TODAY

‘Tis the season for gift cards. If you’re thinking of giving — or asking for — a gift card this year, you’re not alone. Gift card sales are expected to reach over $40 billion this year. But there are some reasons to be careful about how you use them — service fees and charges that can cost you extra cash. “Today” financial editor and Money magazine editor-at-large Jean Chatzky offers some advice.

Retail analysts are scratching their heads about the absence of one hot product — one Tickle Me Elmo, one Cabbage Patch Kid — to drive holiday sales. In it’s place is one hot, hot, hot category: gift cards. Bain & Co., a Boston-based consulting company, predicts that gift-card sales will grow 15 to 25 percent this holiday season to between $42 billion and $45 billion in total. That represents about 20 percent of all holiday sales.

What are gift cards?
Most Americans already know; in fact, 70 percent say they’ll buy at least one gift card this season. But essentially, they’re plastic cards that look a lot like credit cards but work like debit cards in that they’re preloaded with $25, $50, $100 or more. Some of them work at particular stores, like Barnes & Noble, Target, Banana Republic or Coach, others like the Simon card work at more than 200 malls through the country including the mall of America. And then there are cards issued by banks that work everywhere.

Why have they become so popular?
Because there’s no must-have product, it makes it tougher to know what to buy to make someone happy. But they’re also thought of as a way to give more for less. If you spend $100 on a gift card and prices drop 50 percent the day after Christmas, the gift-getter can actually purchase twice as much. That’s why the number of people who say they’d like to get a gift card this holiday season has climbed to nearly 50 percent.

That said, you have to be careful about how you use them.

Here are some tips:
Buy them in person
Buy these cards online or on the phone and you’ll pay service fees of anywhere from $3 or $4 up to $8 to $10. Online fees tend to be less expensive than over-the-phone fees, but you’re still better picking them up in person.

Watch the fees
Parents who buy a $25 Hilary Duff gift card will actually pay $32 thanks to a $2.50 shipping fee and a $4.50 transaction fee for buying it online. There are also charges for NOT using your card. After a six-month to two-year period, some stores/card issuers begin assessing a “dormancy” fee of $2 to $3 for the administrative cost of maintaining your account. Note: This is a controversial practice for which merchants have taken a lot of heat this year. As a result, JC Penney, Barnes & Noble and Borders have dropped their fees. Some of their cards still note the fees on them, but don’t worry they won’t be charged. Massachusetts and California have already passed laws governing the practice of gift-card fees and expiration dates — the California law doesn’t go into effect until next year. Senator Charles Schumer in New York says he will introduce a federal bill in January.

Watch the expiration datesIf you don’t use your card before it expires, you generally lose the money. In some cases, you can get a replacement card with your remaining balance on it, but it will cost you $5 to $10. If you’re up against the wall, converting the balance to cash is sometimes an option but it’ll cost you $10 to $15 — you’re better off spending the money.

Redeem them
12 percent of gift card recipients won’t redeem their cards at all. That’s a lot of your money down the drain, so make sure that the people you’re giving the cards to are likely to use them. On the other side of the coin, know going in that 65 percent of people spend more than you give them. You may want to use that in deciding whether to buy a card for a person in a cash crunch.

Keep receipts
One big problem with gift cards is if they’re lost or stolen, they’re really gone. In New York, Attorney General Elliot Spitzer has reached an agreement with 18 retailers who agreed to reissue replacements when cards are lost or stolen as long as proof of purchase is available. Some other merchants have indicated they will follow suit. (Sometimes, there’s a charge for a replacement card. In the case of the Hilary Duff card, for example, it’s $10.)

They don’t buy everything
Although gift cards have Visa or Mastercard logos there are exceptions as to what these cards can buy. You can’t buy airline tickets or rent cars, for example. And some store cards — Sears, for example — can’t be used online at the company’s site because of technology issues. Other Visa cards, like the one from U.S. Bank, can’t be used online at all unless your name is embossed on the card.

Bottom line: Read the fine print. Some of it is on the back of the card. Some on the Web site. Some in the literature you get with the card when you buy it.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “You Don’t Have To Be Rich: Comfort, Happiness and Financial Security on Your Own Terms.” Information provided courtesy of Jean Chatzky and Money magazine. Copyright © 2003. All rights reserved. For more financial advice, visit Jean Chatzky’s Web site at: JeanChatzky.com.