dcsimg

Buying A Gift Card Is Like Giving The Issuing Company A Free Loan

Published 3/4/08 (Modified 3/8/11)
By MoneyBlueBook

I don't mind giving gift cards as presents on occasion as I don't see them as inherently evil. While the perception that they are somehow classier or more convenient is silly and misguided, they do serve a useful purpose for particular situations and for certain limited occasions. Of course, my biggest problem with gift cards is the fact they are rarely used right away by recipients including myself. I've received gift cards in the past but they've always sat in my wallet for months before I finally got around to using them. Perhaps it's because I am accustomed to doing most of my shopping online, but I can never seem to find the right time to use up the cards. The longer the cards remain unused, the more money is wasted, and the higher the likelihood that expiration and maintenance fee problems may arise.

A Gift Card Is Nothing More Than A Zero Percent Interest Loan

Unlike giving cash as presents, when you buy a gift card today and redeem it in the future, you're essentially offering the gift card company an interest free loan, whether it be with Best Buy, Starbucks, or Macy's. When one of these companies issues you a prepaid gift card, they've already taken your money and given you a gift card claim ticket towards future purchases in that amount. Until you request for redemption, they have no obligation to pay the amount back as merchandise. Meanwhile they get to benefit from the earned interest on the amount you paid for the cards. Companies would like nothing better than the recipient of the gift card to misplace the card and wind up never using it. So long as the card remains unused, the company continues to enjoy the benefit of a free loan. That is why businesses love marketing, promoting, and selling gift cards. It's a win win proposition for them.

Even Worse For Gift Card Consumers, The Interest Free Loan You Provide Is Unsecured

The longer you delay in using up your gift card, the more you expose yourself to possible balance forfeiture. When you purchase a gift card, the issuing company treats it as an unsecured loan to the company, not cash. If the company should ever heaven forbid face financial difficulty as a going concern and file for bankruptcy protection, because unsecured loans are low on the pecking order of creditors, holders of gift cards are likely going to be one of the first to lose out.

Just take a look at the poor souls who bought or received Sharper Image gift cards for example. Sharper Image has filed for Chapter 11 bankruptcy protection and is currently undergoing a major reorganization. Part of the restructuring is the temporarily suspension of all outstanding and unused Sharper Image gift cards. If you're one of many who purchased or received one of their $50 or even $100 gift cards, you are in serious danger of losing the stored value left on those cards forever. Your only hope is for the restructuring to yield another corporate buyer of the company who will honor the existing gift certificates. That's why it's important not to delay using up gift cards - you want to call in the unsecured loans and redeem them as soon as possible.

Use The Gift Card As Soon As Possible And Don't Even Think About Recharging It

Once the gift card has been handed over as a gift, the card should be redeemed sooner than later. There is no sense in letting the company continue to accrue free interest at the card purchaser's expense. Whatever you do though, don't recharge the card again by adding more to it. There is no financial benefit to be gained for doing so.

At Starbucks and other trendy coffee shops, I always observe them marketing and selling rechargeable debit cards to customers. But I fail to see the prepaid gift card's purpose other than to encourage unnecessary expenditure. Once you have them, the money has already been spent. These rechargeable gift cards are like casino chips, encouraging and facilitating overspending. Furthermore, if you recharge your card, all you are doing is committing and locking yourself further to that particular establishment. This limits your flexibility and freedom of choice. What if you change your mind and want to go somewhere else? Too late, you have to use up that card. Remember, it's okay to occasionally buy gift cards for other people, but you should never buy gift cards for your own personal use other than to engage in gift card credit arbitrage, and certainly you should never attempt to recharge them.

Feed for this Entry

2 Responses to “Buying A Gift Card Is Like Giving The Issuing Company A Free Loan” 

  1. Lily says:

    I never thought about it like that (interest-free loan), but that's a great analogy. Personally, I either buy a thoughtful gift or I give money (which is really a gift of cash + freedom). Too much small print with gift cards!

  2. Nick says:

    Most of this analogy does make sense and anyone who understands the time value of money would agree with you; however, your arguments has several major flaws.

    1. The average amount of a gift card purchase is almost always too small and the length of time between purchase and redemption too short for "interest" to play any mitigating factor.

    2. When you buy a gift card it goes on the company's financial statements as a liability; which, depending on the company can be a good or bad thing, but most often I'd assume a bad thing.

    AND MOST IMPORTANTLY,

    3. The company cannot redeem unused gift cards for their value. It is illegal as this would count as unearned revenue. So, if a consumer were to forget to use their gift card until it expired, the remaining balance would be paid to the state or town or city in which the card was bought.

    Also, why would one run out and make an immediate purchase. I doubt most people are like, "sweet, I just got this gift card but I really want to mitigate the effects of the time value of money so I'll just spend it immediately without serious thought into my purchase.

    I do AGREE with you about the unsecured part, but it's a rare circumstance where gift card companies default on their gift card obligation. Also, I agree that gift card presents are not very different from cash other than psychological factors.

    Also, prices on old products go down. So, if you think of this example. You receive a $50 gift card to XYZ company and the company is currently selling its top of the line ABC product for $49.99. If you were to wait 10 months or longer, the price may have dropped to $39.99 or even lower depending on product life cycle and type of industry. So if you think of it in that sense, you're never gonna be able to make that up in interest. I understand this example stretches, but still it works.

Leave a Reply



If you liked this site, please Add To Bookmark and/or Subscribe To A FeedReader

Search this site