Can I Buy a Gift Card With a Gift Card?
Unravel the complexities of using one gift card to purchase another. Understand the limitations and what typically prevents these transactions.
A common financial question arises when considering using an existing gift card to purchase another. While the concept might seem straightforward, the answer is generally no, due to specific complexities and underlying principles guiding retail policy. Understanding these nuances helps consumers navigate prepaid instruments.
General Rule and Underlying Principles
Purchasing a new gift card with an existing one is not permitted by most retailers, a policy rooted in financial security and accounting principles. A primary reason for this restriction is fraud prevention, particularly concerning money laundering and gift card scams. Allowing such transactions could enable individuals to convert illicitly obtained funds into untraceable gift card balances, making it difficult to track fraudulent activities. Retailers program their point-of-sale (POS) systems to decline these transactions, resulting in an error message online or a direct refusal in-store.
From an accounting perspective, gift cards are treated as a liability, specifically “unearned revenue” or “deferred revenue,” on a company’s balance sheet. When a gift card is sold, the business receives cash but has not yet provided goods or services, so revenue is not immediately recognized. The sale creates an obligation for the retailer to provide future value. Revenue is recognized only when the gift card is redeemed for goods or services, at which point the liability decreases and the earned amount is recorded.
This accounting treatment means gift cards are not considered cash equivalents. Using one gift card to buy another would exchange one liability for another, complicating accurate revenue recognition and obscuring a business’s true financial position. Companies must meticulously track unredeemed gift card balances to ensure accurate financial reporting and compliance with accounting standards.
Types of Gift Cards and Their Usage
The ability to use a gift card for another purchase depends on its type: closed-loop or open-loop. Closed-loop gift cards are issued by specific retailers and can only be redeemed at that store or affiliated merchants. Examples include cards from a clothing store or restaurant chain. These cards are generally restricted from being used to purchase other gift cards, even from the same retailer.
Open-loop gift cards, such as those branded with Visa, Mastercard, or American Express, function like prepaid debit cards. They are accepted wherever the respective payment network is supported, offering broader flexibility than closed-loop cards. While these cards may seem versatile for purchasing other gift cards, they often face restrictions from retailers or card networks. Many stores prevent the purchase of any gift card, regardless of payment method, to mitigate fraud.
Store credit, typically issued by a retailer as a refund or reward, can only be used within that specific store. Unlike gift cards, store credit is not considered a payment method with the same legal regulations, and its terms of use are often more flexible for the issuer. Store credit is also non-transferable and cannot be used to purchase other gift cards.
Navigating Gift Card Terms and Conditions
Every gift card comes with a set of terms and conditions that define its uses and limitations. These terms form a legally binding agreement between the cardholder and the issuer. Consumers should review these conditions, which are often printed on the physical card, included with digital card delivery, or available on the retailer’s website.
These terms will typically outline whether the card can be used to purchase other gift cards, redeemed for cash (rarely allowed except in specific states for small remaining balances), and any applicable expiration dates or fees. Federal law, the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, prohibits gift cards from expiring within five years from their activation date and limits inactivity fees. State laws may provide additional protections, such as requiring cash redemption for small remaining balances.
Understanding these terms can prevent unexpected issues at the point of sale. If there is any uncertainty about a gift card’s usability, contacting the retailer’s customer service or inquiring with a cashier before attempting a purchase. Adhering to these terms ensures a smooth transaction and helps consumers make informed decisions about gift card usage.