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Gift cards are a popular and convenient way to give a gift for any occasion, such as birthdays, anniversaries, holidays, and graduations. With their flexibility and ease, they can make gifting a simpler process.

Despite their convenience, however, it’s important to understand how they work—especially when it comes to making purchases—how they compare with other cards, and how to avoid pitfalls that come with their use.

KEY TAKEAWAYS

• There are different types of gift cards: store-specific (closed-loop), flexible-use (open-loop), and both physical and digital versions, each with their own pros and cons.
• Gift cards are easy to redeem in stores or online, but be mindful of hidden fees, expiration dates, and the risk of losing physical cards.
• Be careful of scams that come in a variety of ways; no legitimate business or entity will ask for payment via a gift card.

How Gift Cards Work 

A gift card is simply a type of prepaid card with a set value that can be used to make purchases at a specific retailer.

You buy a gift card, determine the amount added to it, and present it to a recipient who can then use it as they would any other payment method. (Of course, you can buy a gift card and use it yourself.)

Most stores allow you to use their gift cards in their brick-and-mortar locations and online at their websites. While the process is straightforward and similar to that of cash or a credit/debit card, there may be restrictions on some cards.

Cards come with instructions about:

• How to redeem their value
• Whether there’s an expiration date for use
• Whether they can be used only at specific locations
• If there are activation requirements or special conditions for using them

Different types of gift cards will have their own set of rules. Knowing the types and their specific details can help you make the most of them.

Types of Gift Cards 

Closed-Loop Gift Cards 

Closed-loop gift cards are the most common type of gift card. They can only be used within a retailer’s specific sphere.

For example, an Amazon gift card can only be used to make purchases on Amazon. A Barnes & Noble gift card can only be used in its physical bookstores or on its website.

Closed-loop gift cards are great when you know the recipient’s interests or favorite stores.

Open-Loop Gift Cards 

Open-loop gift cards are a lot more flexible than closed-loop cards. They function like regular credit or debit cards and can be used where major cards are accepted.

To use them, you first load them with a value, such as $20, $50, $100, or whatever amount you choose, and then swipe them at checkout.

They’re great for use almost anywhere, such as at gas stations, restaurants, shops, and movie theaters. However, they may come with activation fees or transaction charges, so it’s important to read the fine print.

Physical Gift Cards 

Physical gift cards are cards you can hold, often with a magnetic strip like most standard cards, and made of plastic or metal.

You can use these in stores and online as you would other types of gift cards. They can be bought in physical stores or online.

Physical gift cards work well as gifts because the recipient can actually hold them and use them in physical locations.

The only downside is that they can be lost, which often means the value on the card is forfeited, as they can be difficult to replace without proof of purchase.

Digital Gift Cards 

Digital gift cards come in electronic form, often in an email or on a retailer’s app. You can use them by entering the card number or PIN at the retailer’s website or by scanning the barcode on your phone in the store.

Digital gift cards are great when you’re not physically near the recipient of your gift, and are easy to gift at the last minute.

They’re also easier to keep track of as they won’t get lost, and they’re better for the environment as no actual card is created.