Gift Cards -- Use 'Em or Lose 'Em

They may seem convenient, but gift cards carry a number of disadvantages.
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An estimated $24.9 billion was spent on gift cards this holiday season, according to the National Retail Federation. You were probably part of that statistic.

While many people like to hold on to gift cards for something special to buy, that's a bad idea. You're much more likely to get the full benefits if you use a card as quickly as possible. Here are the reasons why.

Stores go bankrupt.

The most important reason to use a gift card as quickly as possible has to do with the current economic climate. A number of major retailers have already gone bankrupt in the past year, and it won't be a surprise to see others follow suit in 2009.

When a store goes bankrupt, the bankruptcy court holds the final say as to whether gift cards can be redeemed. While the retailer can petition the court to allow it to continue to accept gift cards, the bankruptcy court considers unredeemed gift cards to be debt and, depending on the situation, may not allow the store to honor the gift card. Basically, once a store enters bankruptcy protection, all bets are off.

Gift cards get misplaced or lost.

Even with the best intentions, if you don't use your gift card right away, there is a decent chance it will never be used. You may put it somewhere and forget about it or place it in a pile of other stuff never to be found again. It is estimated that anywhere from 10% to 20% of gift cards received are never redeemed for merchandise, which results in billions of dollars being wasted. While this is good news for the store and its bottom line (and why they love gift cards so much), it doesn't help your personal finances. By using the gift card right away, you avoid adding your gift card value into this unredeemed gift card number.

Gift cards come with fees.

Time is never your friend when it comes to gift cards. While bank-issued gift cards by Visa and MasterCard are more likely to come with fees, retail store gift cards can come with fees as well depending on which state you live in. Bank gift cards usually carry a host of fees such as an activation fee, a dormancy fee, a maintenance fee and transaction fees, to name just a few. Any fee that comes with a gift card will usually significantly reduce the amount of money that can be used by the holder and can theoretically wipe out the entire amount if you wait too long to use it.

Gift cards can expire.

If you don't use your gift card quickly enough, the card may expire. There are a few states that prohibit

gift cards from expiring

. Even retail store gift cards often come with expiration dates these days, so it's important to read the fine print to know exactly how long you have to use it. If you fail to do so, you may find that it has expired and is no longer good when you finally do get around to using it.

Your card may end up as a gift to the state.

More states are treating unused gift cards as "abandoned property" as a way of shore up their own finances. Gift cards that aren't used after a certain period can be claimed by the state as abandoned property in as little time as a few years. When this happens, the state requires the retailer turn over the gift card amount to the state, which returns the abandoned money to the rightful owner. Of course, since there is no name attached to the purchase of gift cards, this is, in reality, impossible to do. When the money is not claimed, the money goes to the state treasury.

It's best to remember that gift cards come with little consumer protection, so much so that the FTC has even created a

page devoted to them

. Your best defense is taking the gift cards you have received this holiday and using them on post-Christmas sales for any of your current needs instead of finding out they are worthless down the road.

Jeffrey Strain has been a freelance personal finance writer for the past 10 years helping people save money and get their finances in order. He currently owns and runs