Gift cards may affect consumer holiday budget greatly

There's a lot of money flowing through gift cards these days and no indication that will change soon. This holiday season, consumers are expected to spend $26.3 billion on the little plastic rectangles, up from $24.8 billion last year, according to the National Retail Federation.

Photo: Gift cards may affect consumer holiday budget greatly

Even if those numbers are a tad higher than some other estimates, the general agreement is that gift card sales continue to grow even as the products themselves evolve into more interesting forms, including DVDs with extra content, scratch 'n sniff versions and those equipped with sound.

"People want to give them and people want them," said Anthony Giorgianni, associate editor of finance for Consumer Reports magazine, which has decided that this is a fine moment to do a little public education on the smart use of gift cards, Pittsburgh Post-Gazette reports.

But be aware: for all the convenience and flexibility they offer, gift cards aren't without their drawbacks. Cards purchased directly from a store generally work much like cash, but the "general use" gift cards being hawked by some banks and credit-card issuers carry a number of fees and restrictions.

If you are one of those who plan to give a gift card this winter, here are two downsides to keep in mind:

1. Your money won't go as far with gift cards

A $25 gift card will cost you more than the face value, generally around $4 more, plus shipping and handling. An extra few dollars here and there can take a big chunk out of your holiday budget, if you aren't careful.

Beyond that, gift card issuers charge a range of fees to the user. If you are unlucky enough to lose the card, you'll be charged anywhere from $5 to $15 to replace it. And if you stick it in a drawer and forget about it, you'll be hit with further penalties.

If a card is left dormant for too long, the issuer will start charging service fees that incrementally chip away at the value of the card. If the card sits around for one to two years, it may be worth nothing at all when the person finally gets around to using it.

2. Gift cards aren't credit cards

It's true that gift cards can be used in many of the same venues as credit cards, but they aren't interchangeable. As a rule, gift cards cannot be used at hotels or to rent a car. Why? To guarantee you'll have enough money to cover your bill, these types of merchants typically block out an amount of money that can be two to three times higher than the actual service fee -- a fee far exceeding the value of most gift cards.

This is often true of restaurants and gas stations as well. And, due to the proliferation of ATM surcharges, banks won't allow you to use gift cards at ATMs, which makes them near impossible to convert to cash.

A good rule of thumb: if you give a gift card this season, encourage the recipient to use the value of the card before they lose it, and make sure to apprise them of any restrictions on use, MarketWatch advises.

Sources: agencies