Gift cards can be open-loop or closed-loop
. An openn-loop gift card can be used anywhere that brand of card is accepted.
For example, if you have a gift card that’s branded with the Visa logo, you could use it to make purchases anywhere Visa is accepted.2
A closed-loop card, on the other hand, can only be used at specific merchants. For instance, if you purchase a gift card from Starbucks or Amazon, you or the gift card’s recipient would be able to use them to make purchases only at the retailer issuing the card.2
Advantages of Gift Cards
Gift cards can offer a number of advantages. For example:
They can be a good substitute form of payment if you’d rather not pay cash or use a credit card.
Gift cards can be an appropriate gift for the holidays or any other special occasion.
You can use gift cards to control spending (helpful for avoiding bank overdrafts).
They can be easy and convenient to use.
In terms of gift giving, gift cards might be preferable if you have no idea what to buy for someone on your gift list, as they allow the recipient to buy what they want and when they want. Just keep in mind that if you’re choosing closed-loop gift cards over open-loop cards, that limits the giftee’s options for where they can use the cards.
If you’re interested in using gift cards to help kids learn the basics of spending, you may want to research prepaid debit cards for teens. They work similarly but are typically open-loop.
Disadvantages of Gift Cards
Gift cards can also have some downsides. Here are five.
After purchases are made with a gift card, there may be a small amount of money left, which if not used, whether due to forgetfulness or inertia, ends up as money wasted.
You may pay purchase or reload fees to add money.
Closed-loop cards limit purchasing power.
Losing a gift card or having it stolen can be a headache, especially if you have failed to register it or keep the gift card number.
You could be charged an inactivity fee if you fail to use your card.