Recently, a new type of gift card has been cropping up on the Internet: the virtual gift card, sometimes referred to as an “e-gift card.” Instead of buying a plastic gift card for family and friends, you can now buy an electronic credit, which comes with an account number, and email it or text it to the recipient. The recipient either prints out the information and takes it to a store, or uses the account number to shop online just like you would use a plastic gift card. The e-gift card is marketed as a convenient last-minute gift that doesn’t have the risk of being lost or stolen because it doesn’t rely on a plastic device.
But these new “cards” raise issues, because they may not be covered by some state laws and it’s not always clear who is holding onto your money when they are sold online by third-party sellers.
Read our information and tips, below, before you buy an e-gift card:
Federal Protections Apply, State Laws May Not
Under the recently-enacted CreditCARD Act, gift cards cannot expire for five years, be charged a dormancy/inactivity fee for the first 12 months or be charged more than one fee a month after 12 months of inactivity. The Act applies to both tangible and virtual cards.
Some states have stronger gift card laws that still apply to single-retailer cards (e.g., a Target gift card). However, not all states define “gift cards” to include virtual gift cards. That means that a single-retailer virtual gift card may only have the federal CreditCARD Act protections.
It’s Not Always Clear Who Holds the Funds on an E-Gift Card
If you buy a multi-use gift card – the kind with a network logo such as Visa or MasterCard – it’s backed by a national bank. If you buy a single-retailer gift card directly from the retailer, then the retailer holds the funds. If you buy through a third-party seller, it is unclear where the money sits before the recipient uses the funds. The third-party seller probably transmits the money to the retailer, for a commission, within a short period of time.
E-Gift Cards Carry the Same Risks If a Bank Goes Under or Retailer Goes Bankrupt
The key issue here is where your money is, and whether it’s safe. For multi-use, network branded cards, the issuer is a national bank, and it holds your funds. If the bank goes under, the FDIC insures each bank account for up to $250,000. Gift card funds are held in pooled accounts with funds from other cards. Your individual gift card may or may not be insured up to the $250,000 cap, depending on how the pooled account is set up.
For single-retailer cards, if the retailer holds the funds and then goes bankrupt, cardholders may lose all their money. Once in bankruptcy, the retailer must petition the court to set aside gift card funds. If the court does not approve, or the retailer never makes the request, then the only recourse is to file as an unsecured creditor with the court – and you’ll probably get nothing.
CU Consumer Tips for ALL Gift Cards:
• Gift cards often go unused and forgotten. According to a 2007 Consumer Reports survey, 27% of gift card recipients hadn’t used all their cards. If consumers don’t even have a piece of plastic in their wallet as a reminder, it is even more likely that they will forget to use it.
• Although the CreditCARD Act and some state laws help limit expiration dates and fees, it is still possible to get a gift card, forget about it, and then lose part of its value because of fees or lose all of its value because of an expiration date.
• This holiday season, consider giving cash or sending a paper check as a gift. That way, the money won’t expire or be subject to fees.
• If you do give a gift card, make sure the recipient understands the fees and expiration dates, if any.
• And if you receive a gift card, spend it right away! You may not be fully insured if a bank goes under, and you may lose all your money if a retailer goes bankrupt.
For more information on gift cards, click here.