Fed issues rules restricting gift card fees, expiration
Clearer disclosures also part of the rules in effect next August
Taking action required by the credit card reform law passed earlier this year, the Federal Reserve Board on Monday formally announced proposed rules that regulate fees, expiration dates and other key features of gift cards.
"The rules would protect consumers from certain unexpected costs and would require that gift card terms and conditions be clearly stated," the Fed said in summarizing its new rules, which specify how it will enforce the Credit CARD Act of 2009 enacted in May. These regulations won't take effect until Aug. 22, 2010, although a few gift card issuers already are honoring some of them.
So, as the landscape changes on the $50 billion per year gift card industry, it is in your interest to know where the land mines still are and how to avoid them.
"People need to be aware of the fees and the expiration dates connected to many of these gift cards," said Michelle Jun, a staff attorney for Consumers Union, the nonprofit publisher of Consumer Reports. "And they need to know that they may not be able to get every penny of value out of the cards."
Full suite of changes
With that in mind, here is a review of the full suite of impending gift card regulations. We've also provided consumer tips for making the best of the gift card market during this last holiday season before the new regulations go into effect.
New limits on inactivity fees
The value of that gift card you buy or receive today could evaporate by $2.50 or more every month that the card sits unused in a wallet or pocketbook. In industry parlance, this is called a "dormancy fee."
Under the new regulations, dormancy fees cannot be imposed unless the card has been unused for at least 12 months. Only one such fee could be charged per month, and the issuer's policy on dormancy fees must be clearly disclosed.
"Your balance won't disappear before you have a chance to spend it," U.S. Sen. Christopher Dodd, D-Conn., said as the credit card bill was working its way through the government.
Most issuers already comply with at least some of those dormancy rules, though a few issuers have been hitting gift cardholders with fees after only six months of inactivity, according to the Consumer Federation of America, a nonprofit association of nearly 300 consumer groups.
Bulked-up disclosure requirements
Disclosures about dormancy fees and other gift card limitations and policies must be beefed up.
By Aug. 22, 2010, disclosures of all dormancy fees and other service charges must include the amount of such costs and the frequency of their application. And, in a key element of the new law, these disclosures must be made before the consumer buys a gift card "regardless of whether the certificate or card is purchased in person, over the Internet or by telephone." Many of the gift cards currently on the market have packaging that contains or covers important consumer disclosures.
"I think people understand purchase fees," said Cate Williams, vice president of financial literacy for Money Management International. "There's a cost to make the card, market it, put it in a store kiosk. If I buy a $50 gift card, I expect to pay a $2.50 fee. Heck, I would have spent that on gift wrapping and shipping anyway.
"The dormancy fee is the nasty one," Williams said. "After all, the issuing company got their money for the card, why not let the recipient use it? Dormancy fees get the worst rap because they're so insidious."
Reined-in expiration or 'valid thru' dates
Virtually all issuers print a "valid thru" date on gift cards, which allows recipients to use the cards for online and telephone "credit card" transactions that require that information.
In many cases, that date also represents the card's expiration date. If you don't use it by then, that's it. The card is rendered worthless.The credit card industry calls this "breakage."
Under the new law, gift cards cannot expire for at least five years after they were last loaded with money (unless, of course, the full value has been used). These policies also must be "clearly and conspicuously stated." The Fed's new regulations let issuers choose how to accomplish this -- either by making the expiration date five years away, or with prominent disclosures that point consumers toward their replacement cards. In addition, the proposed rules prohibit "the imposition of any fees for replacing an expired certificate or card to ensure that consumers are able to access the underlying funds for the full five-year period."
In addition to restricting dormancy, inactivity or service fees, the Fed rules also include a catch-all phrase covering any other fees: The proposed rule would "require the disclosure of all other fees imposed in connection with a gift certificate, store gift card or general-use prepaid card. These disclosures would have to be provided on or with the certificate or card and disclosed prior to purchase."
Keep in mind that these new regulations will apply to conventional gift cards. They will not apply to:
- prepaid telephone cards
- reloadable cards that are not marketed as or labeled as gift cards
- loyalty, rewards or promotional cards
- cards that are not available to the general public
American Express has announced that it was getting out ahead of the pack when it comes to the new regulations. In late September, the company said it was dropping monthly fees on all of its gift cards -- including dormancy fees, balance-checking fees and card replacement fees. In other words, the funds left on American Express gift cards never expire and never lose value.
"Customers told us that, although they enjoyed the benefits of gift cards, namely convenience, security and control, they felt that having monthly fees undermined the value of the gift card for the purchaser and the recipient," said Marina Hoffmann Norville, director of public affairs for American Express. "We wanted to address this pain point for our customers," she said. "Whatever the face value of the gift card is today, it will always stay the same -- unless, of course, you buy something with it."
Some experts expect other issuers to follow suit, but for now, most general purpose issuers are still imposing limitations and fees, some of which could remain in place beyond August 2010, though issuers will have to disclose them.
"Consumers love to give and receive gift cards during the holiday or any other time for that matter, but they need to understand some rules and differences," said Elizabeth Owens, president of the National Association of Consumer Agency Administrators.
Freelance writer Cathleen McCarthy also contributed to this article.
See related: , The 11 golden rules of practical gift card giving,
Updated: November 30, 2009