Understanding Reward Card Fees

Throughout the year, and especially around the holiday season, we've all seen those news reports and articles warning consumers over the hidden fees associated with reward cards. Prepaid reward cards are now a multi-billion dollar market and all types of reward cards can be purchase anywhere from a retailer to a convenience store. So what is it that you need to know about reward cards before purchasing?

Types of Reward Cards

There are two primary types of reward cards that have very different usage rules. The first is called a 'Closed Loop' reward card. This type of reward card is for a specific retailer such as Best Buy or group of retailers owned by one company such as Gap Inc. (the Gap, Old Navy, Banana Republic, & Piperlime). Closed Loop reward cards can only be used in that store or stores and regulations and any applicable fees associated with that reward card are governed by the state where the company is headquartered.

The second type is called an 'Open Loop' or 'Network Branded' reward card. These are prepaid debit cards that are endorsed by a major credit card network (such as Visa, MasterCard, American Express, etc.) and are issued and protected by an FDIC Bank. Because these cards are supported by a major credit card company, they can generally be used anywhere that credit card is accepted. However it's important to note that these reward cards do not operate exactly like a credit card. Since the amount on an Open Loop reward card is prepaid, when using them to make a purchase its best to tell the cashier how much is on the card and not to charge more than the remaining balance. Otherwise some merchants may decline it if the purchase amount exceeds the reward card's balance.

Do Merchant Gift Cards Lose Value?

Potentially yes, but it's not very typical. This question depends on the merchant selling the card and where it's being issued.

Because all Merchant Gift Cards are governed by the state they are sold or located, each merchant must follow the regulations established by that state and incorporate those rules into the terms of use for each gift card. Most states require at a minimum a 2 year expiration date. The merchant may also choose to set the expiration date beyond the minimum requirement or not set an expiration date altogether, which is common practice for many large retailers. For those merchants who do set an expiration date, some state laws stipulate that the funds remaining on any unused card may become the property of the merchant, or escheat to the state, or a combination of both. For instance, in Georgia if an expiration date is printed on the card and the gift card is not used after 5 years from when it was purchased, you may no longer have the ability to use that card or access those funds.

You should always refer to the terms of use for each merchant gift card, and you can find a brief overview of the applicable laws per state at http://www.ncsl.org/programs/banking/giftcardsandcerts.htm.

Why are there Fees Associated with Open Loop Gift Cards?

The short answer is that the organizations and financial institutions that provide Open Loop gift cards such as a large issuing bank of Visa or MasterCard need to do so to support the costs associated with the production, support, and advantage of being able to use the card virtually anywhere. With a merchant issued gift card, the merchant is depending on making money based off of the products bought in their stores through those gift cards.

Any fees, expiration dates, or usage limitations on an Open Loop gift card depends upon the issuing bank representing that card. Although the basic fee structure and usage is fairly common across most Open Loop gift cards, there are some out there that can vary greatly so it's important to understand the fee structure for the Open Loop gift card you are buying. This information can be found on the terms and conditions.

What do I need to be aware of?

For Merchant gift cards, you may want to consider avoiding a gift card that has an expiration date on it. You typically won't find larger merchants who have expiration dates on their gift cards, but some small and mid-sized merchants do, potentially because they don't know the laws applicable to selling gift cards in their state. Also keep in mind that you will most likely never be able to use or recoup the funds from a gift card to a merchant who goes out of business or files for bankruptcy.

For Open Loop gift cards, there are 3 main things to look for:

1. What is the expiration date? The expiration date is important because if the funds are not used on that card by the time it expires, they may no longer be available, or if they are you may have to pay a re-issue fee ranging from $5 to $15 in most cases. Most programs have at least a year long expiration date which is typically more than enough time since these cards can be used at most locations that accept credit cards.
2. Are there any 'Maintenance' or 'Dormancy' fees associated with the gift card? A Dormancy fee is a fee that is deducted from the balance remaining on the card, typically on a monthly basis, after a given time period. For instance, a provider of an Open Loop gift card such as a bank or credit union may charge $2.50 per month after 6 months if the card is not used in full. Surprisingly this is standard practice for most all Open Loop gift card providers, and unfortunately for a small percentage of people that don't use their card within the first few months; this may come as a total surprise. WRL actually provides both options. For those customers concerned about the card value not being used over a period of time, they can purchase a card that has no Maintenance fees for the first year for $1 additional.
3. What is the processing fee to purchase the gift card? Nearly all Open Loop gift cards have a purchasing fee associated with them that is above the face value. This is necessary as Open Loop cards are more expensive to produce and support. If the fee of one provider is much lower than another, which may be because there are 'hidden' fees such as an Activation fee or fee to call customer service, or a very short expiration date like 3 months.

Although there appears to be a lot of items to watch out for, for the most part purchasing and using a gift card whether it is an Open Loop or Closed Loop gift card is very straight forward and simple.

Happy Shopping!