How Do Gift Cards Work? A Simple Explanation

Gift cards are a widely used form of payment and gifting, offering flexibility and convenience. These prepaid instruments provide monetary value redeemable for goods and services, allowing individuals to choose items from specific merchants.

Fundamental Principles of Gift Cards

Gift cards are prepaid financial instruments with a predetermined monetary value. This digital value decreases with each use until zero. Understanding their two primary categories is important for use.

“Closed-loop” gift cards are issued by a specific retailer or group of affiliated merchants, redeemable only at their locations or online stores. For example, a coffee shop gift card is only usable there. These cards encourage brand loyalty and have issuer-specific terms.

“Open-loop” gift cards are branded with major payment network logos (e.g., Visa, Mastercard). They function like prepaid debit cards, accepted wherever the network is honored, providing broad spending flexibility. Their value is typically held by a financial institution, allowing wider acceptance.

Using Your Gift Card

Redeeming a gift card is straightforward, though steps vary. Many are activated automatically by the cashier at purchase. Some require recipient activation via a website or toll-free number, usually involving the card number, security code, and expiration date.

In a physical store, present the gift card to the cashier for scanning or manual entry. For cards with a PIN, enter it at the payment terminal. If the purchase exceeds the balance, use the gift card for partial payment and cover the rest with another method. Informing the cashier of the exact balance ensures a smooth transaction.

For online purchases, use gift cards during checkout by entering the card number, expiration date, and security code. Some online retailers may not allow split payments, requiring the gift card to cover the entire purchase or conversion to an eGift card. Ensure the gift card balance is sufficient, as many systems require it to cover the full amount unless partial payment is an option.

Key Considerations for Gift Card Holders

Managing gift cards involves checking balances, protecting against loss, and understanding terms. Balances can be checked by visiting the issuer’s website (entering card number and security code), calling the toll-free number on the card, or asking a cashier. Many issuers offer mobile apps or online systems to track balances and history.

If a gift card is lost or stolen, immediate action may help recover funds. Contact the retailer or issuer promptly, providing information like the card number, purchase receipt, or date. Registering cards online can offer security, potentially facilitating replacement. While recovery isn’t guaranteed, prompt notification increases favorable outcomes.

Federal law, the CARD Act, provides protections for gift card holders. Cards generally cannot expire for at least five years from issuance or last fund addition. The law restricts dormancy or inactivity fees unless inactive for at least one year. Fees or expiration terms must be clearly disclosed on the card or packaging.