Why Prepaid Cards are NOT Gift Cards

Although it may not feel like a very personal gift, you probably can’t go wrong giving a gift card as a holiday present. Gift cards/certificates and cash are the top two gifts consumers want to receive this holiday season, according to the Deloitte annual holiday survey.

And prepaid cards continue to grow in popularity, sometimes as an alternative to a checking account and sometimes as a type of gift card.

Is one better than the other? Here we describe the differences so you can decide.

For purposes of this article, prepaid cards refers to reloadable prepaid cards — and not to cards that are marketed as a way to give someone a specific amount of money as a gift. This is an important distinction because reloadable prepaid cards are not covered by the Credit CARD Act’s rules for gift cards, while true gift cards — even those that carry the American Express, Visa or MasterCard logo — are.

Flexibility

Gift cards: Cards that are associated with a particular retailer can, of course, only be used to make purchases at that retail store. Depending on the retailer, though, it may be possible to use a gift card for one store to purchase a gift card to another retailer, though that’s not always possible. (You can’t buy a Limited Express gift card at Aeropostle, for example, though you may be able to buy an Amazon gift card at Office Depot.) If you’ve received gift cards you don’t plan to use, you can sell them on gift card exchange sites, or exchange them for a card you prefer. You can also buy gift cards at a discount on these sites. Not sure which store your gift recipient prefers? Consider a mall-wide card, or a card that carries the logo of one of the major card issuers, so that the person who gets the card can can shop at all the stores in the mall or wherever he or she wants.

Prepaid cards: These cards are very flexible since they can be accepted anywhere that particular brand of card — MasterCard, Visa, or American Express — is accepted.

Lost or Stolen Cards

Gift cards: If you lose a retail gift card, you may be out of luck unless you can a.) prove to the merchant that you purchased the card and b.) report the loss or theft before the balance is used. If you registered the gift card through the merchant when you received it, then the first problem is taken care of, and as long as the card hasn’t been used you should be able to get the card cancelled and a new one reissued. (Individual retailers may set their own policies.)

Prepaid cards: You may have more protection here than with retail gift cards. American Express cards carry its Fraud Protection Guarantee; Visa cards are covered by Visa’s Zero Liability policy; and cards carrying the MasterCard logo are covered by MasterCard’s Zero Liability Protection. These programs generally mean that cardholders aren’t responsible for fraudulent purchases as long as the loss or theft is reported promptly. However, there are some exceptions; for example, Visa purchases made with a PIN and not processed on the Visa network. Consumer Action pointed out in its survey of prepaid cards that there are gaps in this protection, so read the fine print.

To be on the safe side, always register a gift card or prepaid card right away and keep a receipt, if you have one, in case your card is lost or stolen or you run into a problem with the card.

Fees

Gift Cards: The CARD Act prohibits inactivity or service fees in the first year, and after the first year there can only be one fee assessed per month. A general purpose gift card (such as one carrying the Visa, American Express or MasterCard logo) may charge a fee when you purchase the card.

Prepaid Cards: Most of these cards charge a monthly fee, and may charge other service fees. For example, there may be a fee to reload money, withdraw funds at an ATM or even to receive a paper statement.

Expiration Dates

Gift Cards: Cannot expire in less than five years, per the CARD Act. However, if fees are charged after the first year, they can erode the balance.

Prepaid Cards: The Federal Reserve reports that the average prepaid card is active for six months or less. If you let a prepaid card sit on the shelf, the value can drop — sometimes fairly quickly — due to monthly fees.

Image: Nomadic Lass, via Flickr