How to Navigate the New Gift Card Rules

photo: Surat Lozowick

Thanks to new banking regulations taking effect in August 2010, millions of Americans are going to get nicer presents for the  holidays.

No, the Federal Reserve isn’t giving out free toasters. But they did just issue new rules about gift cards. Here are the details:

Restrictions on monthly fees

Gift cards can’t charge you a monthly fee unless you haven’t used the card for 12 months. They can only charge you one fee per month, and they have to spell out right there on the card what they’re going to charge you.

Longer expiration-date requirements

When you buy a gift card, the balance can’t expire for at least 5 years from the time you buy it. Or, if it’s a reloadable card, 5 years from the time you last reloaded it. (In practice, this means many cards won’t expire at all.)

This applies both to single-store cards (like an iTunes card) and  the Visa/Mastercard/Amex general-use gift cards which can be used at any store.

“It is going to have a big impact,” says Ron Shevlin, senior analyst at Aite Group, a financial industry consultant, “And it’s unfortunate that the issuers had to be forced to do this instead of realizing it  was a shady business practice to begin with.”

Before readers cram my stocking with Best Buy cards, however, the devil on the Fed’s other shoulder would like to point out the  flipside:

There’s no maximum on those monthly fees. If Applebee’s wants to charge you $100 a month after your card has been sitting unused for a year, that’s their prerogative, as long as they warn you. I hasten to add that Applebee’s doesn’t do that; it’s a purely fabricated example. Mmm, ribs.

Your card could still expire. Notice where I said “the balance can’t expire for at least 5 years”? That’s because the card itself can expire. This is mostly an issue with general-use cards, which carry an expiration date like a credit card. And it works the same way: you have to get a new card, but nothing about the unerlying account changes. The card issuer has to explain clearly on the packaging how to replace the card when it expires, and they’re not allowed to charge you for the new card, but if you forget to do this, they’re not going to cry over it.

In fact, after 5 years from the day you purchase the card, the store could just confiscate all your money and point and laugh.

To Linda Sherry, spokesperson for Consumer Action, the new rules don’t go far enough. “Our position all along has been that there should be no fees and no expiration date, so obviously we’re not completely pleased by it,” said Sherry. “People put their hard-earned money toward these cards. There’s no substantive reason that their money should be taken away even after five years, or in fees eating up the balance after one year.”

Sherry recommends buying single-retailer cards rather than general-use cards; the general-use cards tend to have more draconian policies, she says. (For example, the general-use Visa gift cards sold at my local bank branch charge a $2.50 monthly fee after the first year, and that’s better than average.)

Furthermore, the new rules may not affect you at all. If you live in a state that already has a strong gift card law, state law preempts the federal regulation. In California, for example, dormancy fees aren’t allowed, except on balances under $5, and expiration dates aren’t allowed at all. Some state rules, including California’s, apply only to single-retailer cards, so California residents who hold a Visa/MC-logo gift card still get the benefit of the new federal rules. (Here’s a rundown of all the state gift card laws, from Consumers Union.)

Finally, the new rules don’t do anything to specifically address the issue of breakage, which is unclaimed gift card balances–also known as your gift to the retailer. Breakage occurs for a variety of reasons: you lost the card, it expired, the balance is too low to bother with, you got a Hot Topic gift card but you’re over 14, and so on.

There’s big money in breakage. Market research company TowerGroup estimates that out of $87 billion in gift cards sold in 2009, $5 billion will go unredeemed. Which sort of makes you want to go into business trolling the street for unused gift cards. Mmm, ribs.

Shevlin says the new rules will reduce breakage, albeit indirectly. “In the past, by accelerating the expiration date,” he said, “the card issuer had the benefit on the breakage side.” Now, with no fees for the first year and no expiration for five years, you’re less likely to decide that card isn’t worth bothering with.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.