How a Gift Card Works: Activation, Types, and Fees

Gift cards function as a form of prepaid monetary value, allowing recipients to acquire goods or services from a specific merchant or across a broader network of businesses. They serve as a convenient alternative to cash or traditional credit/debit cards, providing flexibility for both gift-givers and those receiving them. Essentially, a gift card represents a stored value that can be redeemed for purchases, making it a popular choice for various occasions.

Activating and Using Your Gift Card

Before a gift card can be used for purchases, it typically requires activation, a process that links the physical card or digital code to its monetary value within the issuer’s system. Many gift cards purchased in physical stores activate automatically at the point of sale. For cards acquired online or through other channels, manual activation is often necessary via a designated website or a toll-free number provided on the card. Manual activation usually requires the gift card number, a Personal Identification Number (PIN) often found under a scratch-off panel, and a Card Verification Value (CVV) or Card Identification Code (CID).

Once activated and loaded, a gift card can be used for transactions. For in-store purchases, present the card to the cashier, who will swipe it through a payment terminal, scan a barcode, or manually enter the card number. If the card has a PIN, you may be prompted to enter it on the keypad. If your purchase exceeds the card’s balance, most retailers allow you to use the gift card for its remaining value and pay the difference with another accepted payment method.

Online, a gift card is treated like a credit or debit card during checkout. You will enter the gift card number, its expiration date if applicable, and the security code (CVV) into the designated payment fields. After a transaction, any remaining balance typically stays on the card for future use. You can check your gift card balance through the retailer’s website, a dedicated online portal, or by calling the customer service number usually located on the back of the card.

Understanding Different Gift Card Types

Gift cards fall into two main categories: closed-loop and open-loop, distinguished by their acceptance scope and the underlying financial networks that process their transactions. Closed-loop gift cards are specific to a single retailer or a group of affiliated merchants. Examples include gift cards from a particular coffee shop, a large home improvement store, or an online retail giant. These cards are typically issued directly by the merchant and often come with no activation fees for the consumer.

Open-loop gift cards are network-branded, bearing logos such as Visa, Mastercard, American Express, or Discover. Issued by banks or other financial institutions, they function much like a standard debit or credit card. They can be used anywhere the associated payment network is accepted, providing a high degree of flexibility for the recipient. While open-loop cards offer wider acceptance, they may include initial purchase fees and could be subject to other types of fees.

Key Considerations for Gift Card Holders

Gift card holders should be aware of certain terms and conditions that can impact their value and usability. Federal regulations, such as the CARD Act, stipulate that most gift cards cannot expire in less than five years from activation or the last time funds were added to them. Issuers are required to clearly and conspicuously disclose any expiration terms on the card. Promotional cards or those issued as part of loyalty programs may have different expiration rules and be exempt from these federal protections.

Fees are another consideration. While many closed-loop cards are free of ongoing charges, open-loop cards might have an initial purchase fee. Federal law restricts dormancy or inactivity fees, prohibiting them unless the card has been unused for 12 months. If such a fee is imposed, only one can be charged per calendar month, and it must be clearly disclosed to the consumer before purchase.

Treat gift cards like cash; recovery of funds is not always guaranteed if they are lost or stolen. It is advisable to keep the original purchase receipt and a record of the card number. Registering your gift card with the issuer, if available, can provide an added layer of security, making it easier to replace the card or recover its balance by establishing ownership. If lost or stolen, immediately contact the issuer; replacement varies, with closed-loop cards often providing less protection than registered open-loop cards.