If your Christmas stockings have been overflowing with gift cards in recent years, you're not alone. Deloitte's Annual Holiday Survey found that gift cards have been the most popular presents for six consecutive years, including 2009. Like most consumer goods, purchases of gift cards decreased last year, according to the National Retail Federation. But that change is related to the recession. Dave Sievers, a principal at Archstone Consulting, a business advisory firm, predicts that gift card sales will be flat or slightly down this holiday season, which is "in line with the retail economy as a whole." Still, the market for gift cards is so competitive that retailers are offering new bells and whistles to draw shoppers in, even stretching the definition of "card." "You have gift cards for baby showers shaped like a baby bottle, for example," says Sievers.

For busy Americans who don't have the time or inclination to find the perfect gift for each person on their shopping list, a gift card is the next best thing. "It's a close substitute for cash," says Joel Waldfogel, an economist at the Wharton School of the University of Pennsylvania. "With a gift card, I can give cash without the social awkwardness."

But while it might be popular to buy gift cards, about 10 percent of the value on all those purchased gift cards goes unused by recipients. "We all have these drawers full of gift cards that never get used," Waldfogel says. Many states allow retailers to reclaim the value of unused gift cards after a couple of years. In his new book Scroogenomics, Waldfogel says that when shoppers buy gift cards, a good portion of the value might be going to the shareholders of large retailer chains because much of the unused value of the cards will go right back into the companies' coffers.

But even if shoppers remember to use their gift cards, there can still be problems. Cards issued by a financial institution--which can be used like cash at many different stores as opposed to just one--have recently come under scrutiny from regulators. The Federal Reserve issued new rules that apply to gift cards intended to "protect consumers from certain unexpected costs" such as hidden fees. But these regulations won't go into effect until 2010, so they won't help shoppers in the 2009 holiday season.

Millions of Americans will both give and receive gift cards this year--64 percent of all consumers, according to the Deloitte survey. Here's how to get the most out of these gifts.

Recognize deadlines. One result of the popularity of gift cards has been a move away from expiration dates on the part of the providers. In response to consumer demand, retailers have mostly phased out limits on how long recipients can use a gift card. "You'd be hard-pressed to find a branded national retailer that has an expiration date," says Sievers. On the other hand, bank gift cards typically have expiration dates. The new Federal Reserve regulations, however, would require all gift cards to be good for at least five years.

There is evidence that the shift away from expiration dates makes cards less likely to be used. New research suggests that the shorter the period until a card reaches its expiration date, the more likely you are to use a card for an enjoyable activity or experience, like eating at an expensive restaurant or going to an amusement park.

Suzanne Shu and Ayelet Gneezy, marketing professors at the University of California-Los Angeles and the University of California-San Diego, are preparing to publish a paper describing experiments they conducted that show how deadlines affect consumers. One experiment looked at how a group of undergraduates used gift certificates for a piece of cake and drink at a cafe. Shu and Gneezy gave half of the test subjects certificates that expired in three weeks, and the other half received certificates that expired in two months. About 30 percent of subjects in the first group redeemed their certificates, while only 6 percent of the certificates received by the second group were redeemed. Follow-up surveys showed that the most common explanations for subjects not using the certificates were "I was too busy and ran out of time" and "I kept thinking I would do it later." Most of the test subjects who failed to use the certificates reported that they regretted not doing so.

According to Shu, the reason the subjects procrastinated is that "people feel the need to save [the certificates up] for the right moment." But the longer the period they have to act, the more likely people are to wait for that right moment--until it's too late. A shorter deadline, on the other hand, motivated more people to act. "If you know you have a short period of time, you're going to fit in as much as you can," she says. If you have a card that does not expire, Shu predicts you will probably behave much like the people in the second group of her experiment: "A long period of time just increases the chance that they won't use [the cards]."

Shu says her research has implications for both givers and recipients of gift cards. If you're planning to buy gift cards for friends and family this year, cards for more mundane places like grocery stores might make a better gift than those for special occasions like a night out at a fancy restaurant. "The more run-of-the-mill cards are most likely to be used," says Shu. If you get a card without an expiration date this year, pencil your own deadline for when you think you should use the card, suggests Shu.

Pick the right card. The majority of gift cards issued by a single store don't have expiration dates, but that's not the case with bank gift cards. Not only do bank cards typically have expiration dates, but they can also come with fees, another feature that's not typical of store gift cards. For example, issuance fees are flat fees that kick in when you activate the card. More worrisome are dormancy fees, which can be a monthly charge that applies if you leave the card inactive for a certain period of time. Store gift cards also differ because retailers and banks have different incentives for issuing them. "Retailers do it to promote brands. The bank is purely interested in economics, and banks make money off fees," says Sievers. However, banks also provide an additional service--they work at any store that accepts the brand logo on the card, typically Visa, MasterCard, or Discover. "Consumers like bank cards because they're flexible; you can use them anywhere," says Sievers.

The new Federal Reserve regulations will prohibit gift cards that carry fees for being dormant for at least one year. The regulations will also stipulate that fees must be made "clear and conspicuous" by the issuer.

Know your state laws. Many states have laws regarding escheat, the right of the state to take unclaimed property, in which the unredeemed value of an unexpired gift card goes to the state government after a certain period of time--typically between three and five years. Some states, such as Massachusetts, specifically exclude gift cards or certificates from their escheat laws, essentially making gift cards good for redemptionin those states forever. In other states, the laws are more complicated. In California, for example, most gift cards are excluded from escheat laws. But the value of cards with expiration dates returns to the state after three years if they're not used. With a few exceptions, only bank cards can have expiration dates in California.

Rules on fees and expiration dates also widely vary from state to state. Many states have regulations that apply only to retailer gift cards. Connecticut, Rhode Island, Hawaii, and Vermont are some of the states that ban fees and expiration dates for all gift cards.

 

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(c) 2009 U.S. News & World Report