What is a 'Gift Card'

A gift card is a prepaid payment card that contains a specific amount of money available for use on a variety of electronic payment purchases.

BREAKING DOWN 'Gift Card'

Gift cards are a form of prepaid debit cards preloaded with funds for future use. There are generally two types of gift cards, open loop and closed loop cards. Both types can typically be used online and in person.

Many gift cards will have a minimum and maximum initial loading amount. A common minimum is $10, and a common maximum is $500. In some situations, they can be used to pay for a portion of a purchase with cash, debit or credit used to balance the expense. As a precaution to mitigate the risk of losses, many gift cards can also be registered online which allows the remaining balance to be tracked and frozen if a card is lost. In this way, some gift cards are safer than cash.

Closed Loop Gift Cards

Closed loop cards can generally only be used with a single merchant. Gap and its affiliated companies provide one exception since store cards can usually be used interchangeably at Gap, Banana Republic, Old Navy and Athleta.

Closed loop gift cards are often marketed by retailers allowing customers to load prepaid funds that can be used for future purchases. They will usually not require any activation fees. Consistent with other closed loop cards, these gift cards will also not include a processor’s logo.

Closed loop gift cards are usually not reloadable, so once the balance is spent, they have no further use. Funds on a closed loop gift card may also have a specified expiration requirement which requires the user to use the card within a specific timeframe.

Closed loop cards are popular gifts for weddings and baby registries. They allow a cardholder to purchase anything from a specified retailer. Many gift registries also offer closed loop gift cards as a bonus for individuals who register.

Open Loop Gift Cards

Open loop cards offer the equivalent of cash that can be used at any merchant where the payment card processor is accepted. Open loop gift cards can be from any of the major processors including American Express, Visa, Discover or MasterCard. These cards will display the payment processor’s logo and can be used to make all types of electronic payments nearly anywhere.

Open loop gift cards also have the advantage of serving as a standard prepaid card. These cards are usually reloadable allowing the user to add funds on their own as well. Open loop cards will sometimes require an activation fee of approximately $5 which must be paid at the time the card is purchased and activated.

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