Buying A Gift Card Is Like Giving The Issuing Company A Free Loan

Published 3/4/08 (Modified 3/9/11)
By MoneyBlueBook

I don't mind giving gift cards as presents on occasion as I don't see them as inherently evil. While the perception that they are somehow classier or more convenient is silly and misguided, they do serve a useful purpose for particular situations and for certain limited occasions. Of course, my biggest problem with gift cards is the fact they are rarely used right away by recipients including myself. I've received gift cards in the past but they've always sat in my wallet for months before I finally got around to using them. Perhaps it's because I am accustomed to doing most of my shopping online, but I can never seem to find the right time to use up the cards. The longer the cards remain unused, the more money is wasted, and the higher the likelihood that expiration and maintenance fee problems may arise.

A Gift Card Is Nothing More Than A Zero Percent Interest Loan

Unlike giving cash as presents, when you buy a gift card today and redeem it in the future, you're essentially offering the gift card company an interest free loan, whether it be with Best Buy, Starbucks, or Macy's. When one of these companies issues you a prepaid gift card, they've already taken your money and given you a gift card claim ticket towards future purchases in that amount. Until you request for redemption, they have no obligation to pay the amount back as merchandise. Meanwhile they get to benefit from the earned interest on the amount you paid for the cards. Companies would like nothing better than the recipient of the gift card to misplace the card and wind up never using it. So long as the card remains unused, the company continues to enjoy the benefit of a free loan. That is why businesses love marketing, promoting, and selling gift cards. It's a win win proposition for them.

Even Worse For Gift Card Consumers, The Interest Free Loan You Provide Is Unsecured

The longer you delay in using up your gift card, the more you expose yourself to possible balance forfeiture. When you purchase a gift card, the issuing company treats it as an unsecured loan to the company, not cash. If the company should ever heaven forbid face financial difficulty as a going concern and file for bankruptcy protection, because unsecured loans are low on the pecking order of creditors, holders of gift cards are likely going to be one of the first to lose out.

Just take a look at the poor souls who bought or received Sharper Image gift cards for example. Sharper Image has filed for Chapter 11 bankruptcy protection and is currently undergoing a major reorganization. Part of the restructuring is the temporarily suspension of all outstanding and unused Sharper Image gift cards. If you're one of many who purchased or received one of their $50 or even $100 gift cards, you are in serious danger of losing the stored value left on those cards forever. Your only hope is for the restructuring to yield another corporate buyer of the company who will honor the existing gift certificates. That's why it's important not to delay using up gift cards - you want to call in the unsecured loans and redeem them as soon as possible.

Use The Gift Card As Soon As Possible And Don't Even Think About Recharging It

Once the gift card has been handed over as a gift, the card should be redeemed sooner than later. There is no sense in letting the company continue to accrue free interest at the card purchaser's expense. Whatever you do though, don't recharge the card again by adding more to it. There is no financial benefit to be gained for doing so.

At Starbucks and other trendy coffee shops, I always observe them marketing and selling rechargeable debit cards to customers. But I fail to see the prepaid gift card's purpose other than to encourage unnecessary expenditure. Once you have them, the money has already been spent. These rechargeable gift cards are like casino chips, encouraging and facilitating overspending. Furthermore, if you recharge your card, all you are doing is committing and locking yourself further to that particular establishment. This limits your flexibility and freedom of choice. What if you change your mind and want to go somewhere else? Too late, you have to use up that card. Remember, it's okay to occasionally buy gift cards for other people, but you should never buy gift cards for your own personal use other than to engage in gift card credit arbitrage, and certainly you should never attempt to recharge them.