New Federal Law Protects Gift Card Users

Is the gift card that you received for your birthday last month burning a hole in your pocket? Do you still have an unused gift card from the holidays? Consumers often have had to worry about using gift cards before they lost their value. That will now begin to change for the better.

Until recently, many gift cards users had few legal rights to protect them from fees and expiration dates. Although some states had laws protecting gift card users, there was no federal law offering nationwide consumer protections. That has now changed with a new federal law (the Credit Card Accountability Responsibility and Disclosure Act) that provides important protections for gift cards sold on or after August 22, 2010.

The new law applies to both store gift cards and bank-issued gift cards. Store gift cards can be used only at a particular store or group of stores, such as a book store or clothing retailer. Bank-issued gift cards include those with a MasterCard, Visa, American Express, or Discover logo.

However, the law does not apply to cards that are given as a reward or as part of a promotion (for example, a free gift card given to you by a store if you purchase merchandise or services). Likewise, the new law does not cover other types of prepaid cards, (for example, a reloadable prepaid card with a MasterCard, Visa, American Express, or Discover brand logo that is intended to be used like a checking account substitute).

The new federal law provides the following consumer protections:

Limits on expiration dates. The money on your gift card will be good for at least five years from the date the card is purchased. Any money that might be added to the card at a later date must also be good for at least five years.

Limits on fees. Gift card fees typically are subtracted from the money on the card. Under the new rules, many gift card fees are limited. Generally, fees can be charged only if you haven't used your card for at least one year and you are only charged one fee per month. These restrictions apply to fees such as dormancy or inactivity fees for not using your card, fees for using your card (sometimes called usage fees), fees for adding money to your card, and maintenance fees.

You can still be charged a fee to purchase the card and certain other fees, such as a fee to replace a lost or stolen card. Make sure you read your gift card disclosure carefully to know what fees your card may have.

In addition to the federal law, some states provide additional consumer protections for gift card users. In some states, the law may provide greater protection than the federal law. For example, some states do not allow gift cards to ever expire.

In California, most gift cards cannot have any expiration dates or service fees. In this respect, California law is more consumer friendly than the federal law. However the California law does not apply to multiple retailer gift cards such as mall gift cards or bank gift cards including Visa and MasterCard gift cards. For those types of gift cards, only the federal law would apply.

With many retailers recently filing for bankruptcy, you should be aware of the rules governing gift cards in a bankruptcy proceeding. A gift card sold by a merchant that seeks bankruptcy protection may have no value. However, the holder of the gift card may have a claim against the bankruptcy estate. Merchants that file "Chapter 11" (reorganization) bankruptcy intend to stay in business, so they typically will ask the bankruptcy court for permission to honor gift cards in an effort to maintain good customer relations. If the bankruptcy court does not allow gift cards to be honored, or if the merchant files "Chapter 7" (liquidation) bankruptcy, holders of gift cards are creditors in the bankruptcy case.

For more information on consumer protection for gift cards, read our Fact Sheet 32, Paper or Plastic: What Have You Got to Lose?