Today Mellody talks about the down side of buying gift cards.

I hate to be a wet blanket, but as we kick off the holiday season, I need to get the truth out there: gift cards stink. It’s an enormous business, with sales expected to reach $100 billion this year. Odds are that the majority of you are going to purchase at least one gift card and that you also would like to receive one. People love them, but they’re kidding themselves.

What do you have against gift cards?

First of all, unless you go through a registration process at one of the few stores who offer them, if a gift card is lost, that’s it. And even if you do manage to hold onto a gift card, so many cards sit around collecting dust never to be redeemed. Consumer Reports has repeatedly warned the public about the billions of dollars in gift cards that go unredeemed each year. And here’s a stunning statistic reported by the Wall Street Journal: From 2005 through 2011, the total amount of money that went unspent in gift cards was $41 billion. This is great news for retailers—they collected money without actually having to sell anything—but not so great for consumers.

Also, most people end up spending more at the store if they do actually ever redeem the card. Think about it: When was the last time you found something at the store for EXACTLY $40 or whatever the amount was on your gift card? That never happens. What happens more frequently is you don’t want to carry around a card with $3 left on it, so you buy something that costs more than the card value and in essence end up paying for your own gift.

Another one of my issues with gift cards has been addressed—and that’s the expiration date problem. Federal rules now require all gift cards to be good for at least five years from the date of purchase. And some states prohibit the sale of retail gift cards that expire. There’s no law against fees though, and they’re the latest  “gotcha,” especially for gift cards issued by banks and credit card companies. These are the cards that carry a “Visa” or “MasterCard” logo or some other creditor, and you can use them wherever the card is accepted. The catch? Most of them charge a purchase fee ranging from about three to seven dollars, while the majority of store-branded cards don’t carry fees. On top of purchase fees, you have to watch out for dormancy fees. Federal rules allow an inactivity fee to be charged after 12 months. Again, you pay for flexibility: while most store-specific gift cards don’t charge dormancy fees, most of the credit card branded cards do, instating fees of as much as $3 a month if the card isn’t used for a year or more.

What’s so interesting to me is that even knowing all of this, people love to both give and receive gift cards. A recent survey found gift cards at the top of the list of things people wanted—more than clothes, books or CDs.

And there’s a secondary market for gift cards, right?

Yes—a big one. If you’re wedded to the idea of giving Aunt Maureen a gift card to her favorite restaurant, at least don’t pay full price. One option is places like Costco that offer a 20% discount on some restaurant gift cards. The other is the online marketplace—there are a number of websites that sell gift cards for an average of ten to fifteen percent off retail. Conversely, you can use the same sites to sell any unwanted gift cards you have received for about 90 cents on the dollar. The average U.S. household has $300 in unused gift cards, so why not clean out that junk drawer and sell them for the cash?

What do you suggest people give instead?

What’s so confounding to me is that people don’t just give cash.  When you give a gift card, the recipient already knows exactly how much you spent—the mystery of the gift’s worth is already gone. And with cash, the person receiving the gift can get whatever they want with no restrictions. Cash gets a bad wrap as a thoughtless gift, but it’s not like a ton of thought and effort goes into purchasing a gift card from a particular retailer; cash is likely to be an equally appreciated gift, and everyone sidesteps all the gift card pitfalls: Cash never expires, you can use it anywhere and cash is never going to go out of business. Cash is king.

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