How They Work, Pros, and Cons

Gift cards have become one of the most popular and convenient ways to give money, whether for specific stores or online purchases. They offer flexibility for both the buyer and the recipient but may include fees, restrictions, or expiration dates that reduce their value.

Billions of dollars in unused balances go unclaimed each year, according to Bankrate. “Survey: 43% of Americans Have at Least One Unused Gift Card.” Understanding how these cards work, the types available, and how they compare with prepaid cards can help you make the most of them and avoid common pitfalls.

How Gift Cards Work

You’ve probably bought or received one: a small piece of plastic or a digital code that promises instant choice. But few people stop to think about how gift cards actually work.

A gift card is a payment card loaded with a set amount of money. When you buy it, you are paying up front for future spending. The recipient can then use that balance to make purchases at specific stores or, depending on the type of card, anywhere major payment networks such as Visa or Mastercard are accepted.

Here’s what typically happens behind the scenes:

1. You purchase the card and choose the amount to load.
2. The card’s value is stored electronically with a retailer or payment network.
3. Each time it’s used, the purchase amount is deducted from the remaining balance until it hits zero.

Most physical cards can be swiped or tapped in a store, while digital ones can be entered at checkout online or scanned from a phone. In both cases, it is a direct draw from that prepaid balance rather than a credit charge or bank withdrawal.

Even though the process feels simple, a few fine-print details matter:

• Expiration dates: Many cards never expire, but check the packaging or email for confirmation of this.
• Fees: Some open-loop cards include small purchase or activation and inactivity fees.
• Redemption limits: Some retailers restrict where and how cards can be used.
• Finite spending: Unlike prepaid cards, most gift cards can only be used once and cannot be reloaded.

Understanding these details allows for a smooth purchase process versus a frustrating decline message at checkout.

Types of Gift Cards

Not all gift cards work the same way. Knowing the differences can help you choose the right kind for your situation.

Closed-Loop Gift Cards

These are the most common. They can be used only at one retailer or within a specific brand’s network. For example, a Starbucks card works at Starbucks, not Dunkin’. A Target gift card can only be spent at Target stores or online. They’re a great fit when you know the recipient’s favorite place to shop or dine.

Open-Loop Gift Cards

Open-loop cards are backed by payment networks such as Visa, Mastercard, or American Express. They can be used wherever those cards are accepted and feel more like prepaid cash. The only caveat is that sometimes they include activation or service fees. But, because they aren’t tied to a single retailer, they’re popular for general gifts or bonuses.

Physical Gift Cards

These are the traditional plastic or metal cards you can hold. They work in-store and online, and they make gifting feel tangible. The downside is simple but crucial: lose the card, lose the money. That said, some retailers can replace them if you keep the purchase receipt.

Digital Gift Cards

Digital cards arrive by email or text and can be stored in a phone app or digital wallet. They’re ideal for last-minute or long-distance gifts. Because there’s no physical card to misplace, they’re easier to manage and better for the environment. Just remember to keep track of the email or digital code so it doesn’t get buried in your inbox or accidentally deleted.

How To Redeem Gift Cards

Redeeming a gift card is usually straightforward, but the process depends on the type of card and where you use it. Whether it’s a physical card or a digital code, the goal is the same—to draw from the prepaid balance until it runs out.

In Stores

For physical cards, simply present the card at checkout. The cashier will swipe, scan, or tap it, and the cost of your purchase will be deducted from the balance. If you don’t use the full amount, the remaining value stays on the card for future use.

Online

Most gift cards, including physical ones, can also be used on a retailer’s website. At checkout, enter the card number and PIN in the payment section. You might have to scratch off a panel to reveal the PIN code. For digital gift cards, you may be able to scan a barcode with your phone or copy the code directly into the payment box.

For Cash Value

Some states and retailers allow you to redeem remaining gift card balances for cash, usually under a specific amount. You can also sell or trade unused cards through reputable resale sites, although you’ll typically get less than face value.

Pros and Cons of Gift Cards

Gift cards make giving simple, but they are not always the perfect gift. For many people, a gift card removes the stress of finding the “perfect” present. It is thoughtful without being complicated. For others, receiving a gift card can feel impersonal or inconvenient. 

Understanding both sides helps you decide when they are worth it and when cash, or a hand-picked gift, might be better.

Pros:

• Easy and convenient: You can buy them almost anywhere, from grocery stores to online retailers, and they work well when you are short on time.
• Flexible: The recipient can choose what they actually want instead of returning something that missed the mark.
• Budget-friendly: You control the spending limit upfront, which helps avoid overspending on gifts.
• Occasional perks: Some retailers offer promotions such as “buy a $50 card, get $10 free,” especially around the holidays.

Cons:

• Fees and restrictions: Some cards charge inactivity fees that reduce the value over time, but the Federal Trade Commission limits the amount.
• Expiration dates: Most cards remain valid for at least five years under federal law, but state rules vary. Always check before buying.
• Limited use: Closed-loop cards work only at one store or brand. If the recipient rarely shops there, the balance might sit unused.
• Risk of loss or theft: Physical cards cannot always be replaced if lost, and digital cards can be stolen through scams or phishing.

The bottom line is that gift cards work best when they match how the recipient shops. Otherwise, they risk becoming just another forgotten card in a wallet or code in an inbox.

Gift Cards vs. Prepaid Cards

Gift cards and prepaid cards look similar, but they serve different purposes. A gift card is usually meant for one-time use and often tied to a specific retailer or brand. Once the balance is gone, the card can’t be reloaded.

Prepaid cards, on the other hand, act more like debit cards. You can add money as needed and use them anywhere major payment networks are accepted, including for paying bills. They’re designed for ongoing spending and budgeting rather than gift-giving.

Another key difference is consumer protection. Prepaid cards usually offer stronger safeguards, such as registration and balance recovery if the card is lost or stolen. Gift cards may not have the same protections unless you saved the receipt or registered the card.

Beware of Scams

Scammers often target gift card users because the cards are hard to trace once money is spent. Recognizing the warning signs can help you avoid losing funds.

Common schemes include fake prize offers, where someone claims you have won money but must pay taxes or fees with a gift card. Tech support scams are also common, in which callers pretend to represent a trusted company and ask for gift cards to fix a problem that doesn’t exist. 

Online sellers may demand payment with a gift card for an item that never arrives, and some thieves tamper with cards on store racks, draining the balance as soon as the card is activated.

Buy only from trusted retailers, keep your receipts, and never give card information to anyone you don’t know. If someone asks for payment by gift card, it’s almost always a scam.

The Bottom Line

Gift cards are an easy and flexible way to give, but they work best when you know how they operate. Check for fees, expiration dates, and balance limits so the value you give is the value that gets used. A little attention up front can make this simple gift go further and work more smoothly.