Consumer 10.0: New rules should make gift-card buyers merrier

You can line up at 4 or 5 a.m. Friday for the special deals at retailers like J.C. Penney, Wal-Mart, and Best Buy. Or maybe you'll sleep in and hit the mall at a more leisurely time - say, a couple of hours past the break of dawn.

Or you can just skip Black Friday and shop at the "gift card mall" at the grocery, convenience store, or drugstore. True, you'll have to pass on the big discounts and on choosing some special item for your sister or granddad. But at least this year, you probably won't be throwing away much money.

For years, it was part of a consumer columnist's job description to warn readers about one of the stranger inventions of modern commerce: the disappearing gift card.

Generous buyers would plunk down their money - $25, $50, maybe $100 of hard-earned cash. Then the recipient, if he or she was just a little bit slow or indecisive, would discover something strange at the store, restaurant, or spa that had issued it: Some of its value had vanished. Maybe even all of it.

Many consumers were livid, and some gift-buyers were, too, though their objections were at war with the convenience of the cards. Despite their flaws, gift cards have been inching fairly steadily toward the $100 billion mark in annual sales.

The good news is that the marketplace and regulators eventually responded. By last year, virtually every major retailer had given up on purchase fees and "dormancy" fees - those annoying charges that dunned you for putting the card into your wallet, purse, or desk drawer and forgetting it was there.

Even American Express lightened up a bit. Its general-purpose gift card - basically a use-anywhere prepaid debit card - still costs $2.95 to $6.95 to purchase, depending on where you buy it and the denomination. But after that, the money is the recipient's to keep and spend, no matter how long it takes.

This year, the big news is on the regulatory front: In August, new rules implementing the Credit Card Act of 2009 finally took effect, imposing some limits on fees that still plague general-purpose cards issued by Visa, MasterCard, and Discover.

Now gift cards can't expire for at least five years from their date of issue. Money-munching dormancy fees can't begin until after at least a year of inactivity on the card. And key fees have to be listed on the packaging - though you can't fully count on that this holiday season, because Congress amended the law to let card issuers sell out old inventories until Jan. 31.

Dan Horne, a professor of marketing at Rhode Island's Providence College, says retailers began moving away from tricky terms several years ago after customer complaints began and after a cat-and-mouse game in which some states tried various strategies to limit expiration dates and fees.

The monthly fees were partly a response to laws in states such as Pennsylvania, which had long recognized the principle that the money represented by a gift card or certificate couldn't simply be seized with an expiration date.

Instead, issuers were required to treat the money as unclaimed property and turn it over to the Pennsylvania Treasury. So far this year, the state has taken in $335,297 from unused gift cards and certificates, according to senior adviser Corinna Wilson. All told, it's holding about $6.2 million in such money.

To get around such laws, card issuers came up with the notion of charging "service fees," much as banks do, arguing that they needed to be paid for maintaining the gift-card systems and accounts.

Some pushed the envelope more than others, giving consumers just six months before expiration dates or monthly fees kicked in, Horne says. "When I talked to consumers about that, they referred to it as stealing," he says.

That's why retailers finally wised up - that and the fact that gift cards are, well, a gift to their bottom line and cash flows: The merchants take money in now and provide goods or services later - or never. Meanwhile, they get the "time value" of the money. For decades, similar dynamics drove American Express' profitable business in traveler's checks.

While major retailers and Amex have largely moved away from money-munching fees, there are still some potential pitfalls in the gift-card mall:

Visa and MasterCard all-purpose gift cards are likely to have expiration dates or fees, but terms vary with the issuing bank. For example, the Wells Fargo Visa gift card sets an expiration date but doesn't impose dormancy fees, according to a survey by BankRate.com.

The balance never expires on Discover's all-purpose cards, but, as with Amex, the plastic card itself does; you have to request a replacement.

Terms remain confusing as issuers adapt to the new rules. For example, Discover's website says it charges a $5 "replacement fee" to get a new card with the unexpired value. But the Federal Reserve says, "If your card expires and there is unspent money, you can request a replacement card at no charge."

Of course, if you receive a gift card for the holidays, the best idea is to do what the giver probably intended: Spend it soon on something you want. That way, you'll never have to worry what the fine print says.