- The Washington Times - Monday, November 30, 2009

Just in time for the holidays, the Federal Reserve has announced new rules that will restrict fees and expiration dates for gift certificates, store gift cards and general-use prepaid cards. Alas, like a gift card that was activated improperly, the rules are of limited help: The Fed only provided them, it didn’t put them into place.

In fact, the changes won’t be effective until the 2010 holiday season. As a result, you need to be aware of the rules and protect yourself and your loved ones if you are planning to give gift cards and certificates this year.

The new rules, announced last week, are part of the Credit Card Accountability Responsibility and Disclosure Act of 2009. As part of that law, enacted in May, Congress directed the Fed to come up with and implement stricter rules governing gift-card fees.

The proposed rules are coming up for comment next month, at which point they may be revised and finalized. They prohibit issuers from charging dormancy fees on cards unless they have been inactive for at least a year. After that, issuers would be limited to one fine per month.

In addition, cards can’t expire any less than five years from when the funds are loaded and the card is issued or sold.

The rules apply to cards issued by banks and also to lenders’ general-purpose cards that can be used like a Visa or MasterCard as well as to retail cards, although most industry observers say stores have been moving away from fees and expiration dates for years.

Because the new rules won’t be in place until next year, however, that leaves consumers with plenty of reasons to worry now.

According to TowerGroup, an industry consulting firm, Americans spent $88.4 billion on gift cards last year but left $6.4 billion unused. That was down from 2007, when gift cards worth about $97 billion were purchased, with $8 billion unused.

Anyway you slice it, roughly 8 cents on the dollar per card winds up not being cashed in short order, leaving it vulnerable to the fees and charges.

“The problem is that most people who buy gift cards and certificates don’t pay any attention to the rules,” said Linda Sherry of Consumer Action. “The lawmakers had heard from so many of their constituents that these were such a rip-off because the value just disappeared, so that Congress felt that it had to act… But that’s not going to save you this year.”

There are several key areas that consumers want to avoid when it comes to buying gift cards. Sadly, unless you take a magnifying glass to your favorite place to buy a card, you will likely have a tough time figuring out just what applies to your gift.

Your worry starts with dormancy fees, charges placed against the card even if there is no activity. Under the new rules, those charges can’t be applied to a card until it has been dormant for at least a year and can only be applied once every month. Because the rules are not in effect now, however, dormancy fees can be more regular and can start sooner.

Perhaps anticipating the law changes, American Express announced in September that it would stop deducting the monthly $2 dormancy fees that it had charged after a year of inactivity on its “general purpose” gift cards. There’s still an activation fee, plus the money you put onto the card itself, but the new rules “should make American Express a popular choice this year,” Ms. Sherry said.

Beyond dormancy fees, consumers looking at general-purpose cards should check out the issuer’s maintenance fees - which sometimes kick in as a monthly charge once the first purchase is made but the balance is not exhausted. They should know how they can check their balance (preferably free of charge) and understand the fees that are applied at purchase. (Store cards tend to be purchased at face value, but many general-purpose cards carry fees that are paid by the buyer at checkout, adding a hefty charge on top of the gift amount.)

Be sure to look at policies for lost or stolen cards; many general-purpose cards can be replaced, but losing a store gift card typically is like losing cash.

With general-purpose cards, consumers also should look into “blocking” policies, as they may affect how the card can be used. Blocking policies are how card issuers protect themselves during ordinary transactions; separate from the gift-card issue, this is where a consumer might find a “hold” issued on his or her account because of a hotel reservation or big purchase.

The hold, essentially, reserves the funds and makes sure the transaction will go through; once the hotel stay is completed, for example, the hold is released, the funds owed are collected, and everything is set back to normal.

With gift cards, however, blocking can make it hard to use a card where you want. For example, many cards have a policy that requires a hold of 50 percent of the check amount at a restaurant in order to cover a tip. You run up a tab of $30; the card is run before you add the tip; the lender blocks out an amount for the tip; you then mark it down, say $6; and the transaction is finalized.

Take a general-purpose gift card to your local sandwich shop, and the 50 percent tip hold may be in place even if you order carryout and aren’t planning a tip at the pickup window. As a result, if you have eight bucks left on a card, you may not be able to use it to buy a $6 lunch (or even spend it down to nothing) at your favorite luncheonette; the institution sees $6 for the tab, holds $3 for the tip and thinks you have insufficient funds to pay the bill. (Experts suggest that cards with a few bucks on them are easily redeemed at the supermarket; it won’t get you a “gift,” but it will allow you to zero the card paying for something you need.)

“The big thing is to get cards that you are going to use, and to use the cards you get,” Ms. Sherry said. “Terms and conditions, overall, have gotten better in the last few years, and the new rules will make them better still, but the big idea here will always be that the best thing that can happen with a gift card is that you give it to someone who wants it and who values it and who will use it and get the most for your money.”

c Chuck Jaffe can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.


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