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Beware of stimulus check offers

Whenever mom gave you money as a child, she probably issued this simple, sage advice: "Don't spend it all in one place." Now that government stimulus checks are arriving in mailboxes around the country, major retailers are trying to rewrite mom's advice.

You should stick with mom.

Many stores are making an offer that sounds pretty good -- turn your government refund into a gift card at our store and we'll add 10 percent to the balance. For example, take a $300 check into any Sears and you can walk out with a $330 Sears gift card.

Meanwhile, Wal-Mart is offering free Visa-branded bank cards -- which can be used anywhere -- to consumers who load them with stimulus checks, waiving an $8.94 "card-issuance fee." Other fees, however, remain in force, so giving all your money to Wal-Mart is a bad idea, too.

With all these stimulus checks floating around the country -- $110 billion worth -- it should come as no surprise that retailers have concocted creative ways to get their hands on them. While electronic deposit payments arrived in May, paper checks will continue to be issued through July. Many of these 10 percent offers require presentation of the paper refund check.

But the usual advice about gift cards applies here: Cash is almost always better.

Destined for the sock drawer?

Getting the 10 percent bump in gift card value might seem attractive, but you can bet the retailer who gets your money will come out ahead. In fact, that 10 percent is carefully calculated: researcher RK Hammer says 10 percent of all gift card value goes unspent. Meanwhile, last year, Consumer Reports said that 27 percent of consumers have an unused gift card lying around somewhere in a sock drawer. So don’t mistake the offer as generosity. And in the meantime, you’ve ignored mom!

"The big drawback is you have to use all that stimulus money at that retailer," said Michelle Jun, a staff attorney at Consumers Union. "And you may end up leaving a balance on your card."

There are other drawbacks, too. People who do use gift cards tend to spend more than the value of the card when they shop -- something that's called "lift" in the retail industry. Consumers generally overspend by 30 to 60 percent, said Tina Henson, CEO of Plastic Jungle, a gift card exchange site.

In other words, retailers win either way.

Another unanticipated risk: Retailer bankruptcy

But there is another way you can lose, and lose big: If the retailer who gets your stimulus money declares bankruptcy. To a bankruptcy court, a gift card is an unsecured debt; that means the plastic can become worthless overnight. This rather stunning fate happened recently to consumers holding Sharper Image cards, and last year, to those holding Bombay cards.

The story of Sharper Image cards is quite tortured. After initially declaring the cards unusable, a bankruptcy judge later allowed the store to accept the cards under this crazy condition: Consumers would have to buy something worth at least twice the value of the card in order to use it.

The bottom line is this: Consumers who hold gift cards are running more risk than they realize.

There is an exception to this otherwise party-pooper advice on stimulus checks and gift cards. If you already plan to buy one big-ticket item at a store making such an offer, it does make sense to use a stimulus check offer as an instant 10 percent coupon. But to be safe, get the gift card and turn around and buy what you want the same day. That way, you won't forget about it, lose it or risk a surprise bankruptcy.

Meanwhile, anyone who is tempted to give a stimulus check to Wal-Mart and get a bank card in return should really find another way to cash the check. The cardholder agreement for the Wal-Mart MoneyCard lists 13 different fees. Stimulus check users are exempt from only one. They'll still have to pay a $4.94 "monthly maintenance fee," a $1.95 ATM transaction fee, 75 cents to check their balance at an ATM and $2 to call an operator and ask for help.

Letting Wal-Mart nickel and dime you isn’t going to help stimulate the economy! Just keep the cash. It'll be much easier to follow mom's advice that way.

For a fairly comprehensive list of stimulus check offers, you can visit this Web site.

More on the perils of gift cards can be found at the Consumers Union Web site.