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Gift card fees still playing Scrooge

When is a $50 Christmas gift not really a $50 Christmas gift? When you give a gift card.

How much is that $50 gift card really worth? Well, it’s hard to say. The art of irritating and sneaky fees has reached new heights in this 21st century version of gift certificates. There are sign-up fees, transaction fees, dormancy fees and outright expiration dates. Poorly timed use of the cards could make the $50 gift worth more like $40, $30, $20 ... or in some cases, nothing.

Gift cards are definitely not all created equal.  Here's how to make sure the gift you give this holiday doesn't end up as a neatly wrapped present for some company's bottom line instead.

Gift cards have been called the gift that keeps on taking, and for good reason.  In some cases, only a few months after purchase, the cards slowly begin to lose their value, through "dormancy" or non-use fees. Some cards lose their value entirely after a year or two. Companies count on a certain number of consumers who drop the cards into the sock drawer and forget about them. It's easy money.

Consumers have raised a stink about the fees in the past, and state legislatures have reacted. Some even outlaw the fees. But the resulting patchwork of consumer protection laws, and their varying protections, has made the landscape more confusing.

Still, gift-givers are voting with their wallets, and despite the frustrations, they apparently love the cards. Last year, the average consumer received a little more than three gift cards under the tree, according to a study released last winter by Deloitte & Touche. This year, according to the National Retail Federation, holiday shoppers will spend $18.5 billion on gift cards, up about 6 percent from last year. Each shopper will spend about $90 on gift cards, representing 15 percent of their holiday budget.

Store-specific cards are cheaper

If you simply must buy one of those gift cards, be sure to turn it over and read the small print. Buying the wrong card could turn out to yield a pretty thoughtless gift. Specific guidelines are hard to offer, because the fee structures have become so incredibly complex. But there are some general rules you can follow when shopping for cards.

For starters, store-specific cards are usually a far better deal than the general-purpose variety, such as bank-issued value cards -- these look just like credit cards -- or cards that can be used in several stores at a mall.  The flexibility of letting recipients buy anywhere they want often isn't worth it. Most general-purpose cards come with up-front fees, as well as hefty replacement fees, maintenance fees and even fees for checking your balance on the phone.

Two of the worst examples cited by a recent study conducted by the Montgomery County, Md., Division of Consumer Affairs include the iCARD Visa Gift Card and the Good2Go MasterCard. The iCARD comes laden with a $25 maintenance fee after six months. After that, it can cost $25 to get the balance refunded by check. Refunds cost $75 after two years. The Good2Go card costs $9.95 to purchase and $4.95 each month for maintenance.  A chart of bank gift card fees is available from the Consumer Reports Web site.

Store gift cards are considerably less pricey. In fact, many retailers have given up on sneaky fees altogether. In the recent survey by the Montgomery County Division of Consumer Affairs, 18 of 30 major retailer cards charged no fees. These stores even allow consumers to recover the value of lost cards for free, either by presenting receipts or by registering the card. Now that’s a thoughtful gift. Make sure you give your recipient the receipt along with the card (They already know how much you spent).

A list of these consumer-friendly cards can be found at the Montgomery County Web site.

On the other hand, about one-third of the cards examined by the consumer office slowly leak their value, starting at 12 months after the purchase price, at about $2 a month. It’s these non-use, or “dormancy” fees that really seem Scrooge-like. According to the study, several of the firms inadequately disclose such fees –- so read carefully when you are purchasing. Kmart received especially stinging criticism, because it advertises on its Web site that its gift cards "never expire," but the monthly dormancy fee charged by the company does eventually drain a card's value to zero.

Retailers, of course, love the gift cards, and not just because of the fees. Spending gift card money is a game consumers just can't win. No one buys exactly $25 worth of merchandise. So either you spend more than the value of the card at the store, and plunk down your own money -- or you spend less, and leave some of that cash on the card.

"It's win-win for the retailer," said Kristin Arnold, who conducted a wide-ranging gift card fee study for Bankrate.com. The leftover money might sound like chump change, but it's not. Estimates of unspent gift cards funds -- called "breakage" in the industry -- range from 3 percent to 5 percent. That adds up to several billion dollars a year.

State governments collect fees, too

But while retail stores benefit from holding the cash while waiting for the gift card to be redeemed, they don't necessarily get to keep the unused funds. Many states have unclaimed asset laws known as escheat laws, which eventually require forfeited gift card money to be surrendered to state coffers. Ditto for cards that are lost and never used. It's another hidden fee -- hidden tax, in this case -- that comes with gift cards.

Escheat laws have a bright spot, however. Consumers can sometimes take expired gift cards found in the sock drawer after two years and talk their way into receiving new cards -- since the retailer doesn't get to keep the unspent money anyway.

Arriving at the store armed with knowledge of your state laws will make the conversation much easier. Consumers Union includes a comprehensive list of state consumer gift card laws on its Web site. Connecticut's law, one of the strongest in the nation, is explained clearly at GiftCardLaw.com.

State laws are another reason consumers should choose retail cards over bank cards, says Gail Hillebrand, an attorney for Consumers Union. Some state gift card laws don't apply to bank cards.

"With bank-issued gift cards, the protections are much more spotty," she said.

Don't forget Washington, Jackson, Grant ...

There has been some movement to create a national law that would clarify consumer rights. Earlier this year, Rep. Rodney Frelinghuysen, R-N.J., introduced the Gift Card Protection Act in Congress. The law would instruct the Federal Trade Commission to develop a rule that would essentially outlaw gift card non-use fees and expirations. The bill is so far hiding in the House of Representatives Commerce, Trade and Consumer Protection subcommittee. Frustrated consumers can contact their U.S. representative and ask that he or she support the legislation.

But there is something else consumers can do to fight these pesky fees.

Give cash.

I know, it's tacky. But cash is amazingly flexible. It can be used in any store. There are no up-front fees, no fees for disuse (other than inflation), and greenbacks don't expire.  They can even be used at stores that don't take credit cards at all.  And there's no "breakage."  A holiday card with some cash inside -- or at least an old-fashioned check, so you earn the interest if the money's not spent -- is an excellent, reasonable consumer response to unfair gift card fees.  Of course, this is Christmas, and reasonable consumer responses are not to be expected.