Credit Cards

A Guide to Gifting Prepaid Cards

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Alongside the joys of the holiday season comes the perplexing feeling when you have no idea what to give someone. Perhaps you don’t know the recipient well, or maybe you are just trying to please a person who has everything. At these times, it can be tempting to purchase a prepaid gift card and let the recipient choose a gift.

These prepaid general-use gift cards (as opposed to reloadable prepaid debit cards, which require an individual to open an account in his or her own name) are commonly available at supermarkets, drugstores, gas stations and office-supply stores and can be used anywhere that particular brand of card — MasterCard, Visa, or American Express — is accepted. These are cards that you can buy in a specific dollar amount and then use anywhere like cash.

But a closer look reveals several distinct advantages and disadvantages of giving these products as gifts.

The Possible Benefits

Custom amounts available. General-purpose gift cards can be purchased in many different denominations such as $25, $50, $100 and $200. Additionally, many retailers allow the buyer to specify any amount between $20 and $500.

You can earn credit card rewards when you buy them. Most retailers will allow you to buy gift cards using your credit card, which allows you to earn rewards. And since there are many credit cards that offer bonus rewards at the retailers that sell these cards, buyers have the opportunity to earn substantial points, miles or cash back. For instance, the American Express Blue Cash Preferred card offers 6% cash back for purchases from U.S. supermarkets (on up to $6,000 per year). So someone who purchases a $200 gift card will earn $12 in cash back.

Security. Traditionally, people would send a holiday card that included cash when they ran out of gift ideas. Since you should never send cash in the mail, a general-purpose gift card can be a more secure option.

Convenience. Another alternative to sending cash is writing a check. But for many people, writing a check and balancing a checkbook are chores to be avoided. Purchasing a gift card in the checkout line is an easy way to avoid this task.

Gift card purchases are tax-free for you. When you purchase a general-use gift card, you pay the face value, plus any purchase fees. Then, the recipient will pay any required taxes on his or her purchases with the card. In many places, the activation fee will be less than the equivalent tax on a gift of more than $100.

The Possible Drawbacks

Fees: General-use gift cards are usually have a purchase fee (we found a Visa with candy canes on the front that goes for $3.95, for example). If you want to avoid this expense, you can write a check.

These cards can be difficult to use at gas stations and restaurants. When processed, many restaurants automatically put a hold on credit and debit cards equal to 20% above the bill. If your prepaid card does not have sufficient funds, it will be declined. Likewise, gas stations will place a hold on $75 of a prepaid card’s balance, and will decline any cards with less than that amount available. And even if the charge is approved, the hold can remain for another day or two.

Security with a catch. When you lose a regular credit or debit card, the issuer can cancel the account based on personal information they have on file. General-purpose gift cards can also be replaced if they are lost or stolen, but the holder must know the numbers of the lost card. So while it is important to record a card’s number and keep it in a safe place, the reality is that few people will do it.

Some cards cannot be used outside of the U.S. Many popular gift cards, such as the Vanilla Gift card, cannot be used internationally. Nevertheless, other cards, such as MasterCard gift cards can be used worldwide, although foreign transaction fees may apply. Read the fine print.

Prepaid debit cards lack some purchase protections. Some of the key benefits of using a credit card include the travel insurance and purchase protection policies offered by most major issuers. Unfortunately, purchases made with general-use gift cards often lack traditional credit card protections such as price guarantees or extended warranty coverage.

Difficult to empty. It can be difficult for recipients to empty gift cards when they have a small balance. The best way is to perform a split transaction where the card’s remaining balance is used, and then another form of payment is added. The problem is that some merchants are unable to do this, or just don’t know how to.

At publishing time, the American Express Blue Cash Preferred card  is offered through Credit.com product pages, and Credit.com may be compensated if our users apply and ultimately sign up for this card. However, this relationship does not result in any preferential editorial treatment.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

Image: iStock

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