Gift cards are a popular holiday purchase, but be careful this year

Gift cards are among the most requested and most purchased holiday presents year after year. But 2020 might be the year to reconsider buying a card from just any company.

Foremost, with every day that store aisles are quiet, restaurant reservation lists are short and online sales are disappointing comes the possibility that some of our favorite stores and restaurants may go out of business soon. It’s just a sad reality. Some companies have been hurting for years and the pandemic could be the final blow. Others were doing fine as long as business was robust, but they don’t have the cash flow to sustain the COVID-induced drop in sales.

If you buy a gift card to a retailer or restaurant that suddenly closes, the gift card may be worthless.

Last year, gift cards were the most requested holiday present for the 13th straight year, according to the National Retail Federation. Nearly 60 percent of people asked for one. Shoppers buy nearly $30 billion worth of gift cards a year, with people typically buying three or four cards worth an average of nearly $50 per card. 

Initially, gift cards might seem like an even better choice this year because many people don’t want to risk going out into crowded stores or malls. But this is the exact year to be more careful. 

Already this year, iconic retailers such as JCPenney, Neiman Marcus and J.Crew filed for bankruptcy. Others that have announced financial woes and store closures include Macy’s, Nordstrom, Pier 1, Stein Mart, Forever 21, Bed Bath & Beyond, Victoria's Secret, Office Depot, Bath & Body Works, Lord & Taylor, Family Video, Men's Wearhouse/Jos. A. Bank, Tuesday Morning, and the Signet family of Kay Jewelers, Zales, Jared the Galleria of Jewelry and Piercing Pagoda. We haven’t even gotten to the restaurants. 

To be clear, most of these retailers are expected to remain in business for now as leaner operations. But no one would be surprised if some of them are gone for good next year.

When a merchant declares bankruptcy, there’s a long line of people who get first dibs on any assets, such as the company’s lenders and landlords. People who hold gift cards are near the back of the line.

When RadioShack filed for bankruptcy in 2015 and Toys R Us did the same in 2017, the retailers initially honored their gift cards for a short time. But when The Limited filed for bankruptcy in 2017, its gift cards were immediately unusable, according to giftcards.com. There’s no guarantee.

Interestingly, about one-third of gift card buyers choose restaurants and another third opt for department stores. The remaining third are Visa or AmEx cards or ones for coffee shops, entertainment venues, bookstores, grocers, gas stations, home improvement stores or specialty retailers. 

Even during normal years, gift cards don’t end up working out the way the gift-giver intended. Conservative estimates point to $3 billion worth of gift cards a year that don’t get used. This includes gift cards purchased by someone for her own use or received as a gift.

If you do go the gift card route, here are some tips:

  • Check into the retailer’s or restaurant’s financial situation. Google the name and see whether any closures or other ominous information has been announced. 

  • If you’re buying a restaurant gift card, see whether the location offers take-out service, in case the restaurant closes to indoor dining or the recipient would prefer to avoid sit-down dining for now.

  • Investigate the terms and conditions. Some gift card policies allow use at a related company under the same parent, according to the Better Business Bureau.

  • Use a credit or debit card for the purchase. If the company goes bankrupt or refuses to honor the gift card, your issuer may be able to help reverse the charge so the money is refunded, according to the Consumer Federation of America.

And if you do receive a gift card, use it as quickly as possible. Most retailers offer online orders or free curbside pickup. Many restaurants that don’t traditionally offer carry-out service are doing it during the pandemic. Even if the merchant remains in business, it’s important to remember that the issuer can charge an inactivity fee every month (deducted from the available balance) after the card hasn’t been used for a year, according to the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act. Consumers do have five years after the card was activated or purchased before it can expire by law.