Fifty Bucks Says You Won't Use That Gift Card

In 2015, my brother got married. As the best man, I felt an obligation to go off-registry and give him and his new wife what they really wanted: cash. This idea didn’t sit well with my mom. She argued against it, citing gift cards as a better option so that the new couple wouldn’t "waste" the money on mundane expenses like utility bills or paying down student loan debt. Drawing on years of frugal personal finance, I countered that gift cards provide one of the worst possible values for the recipient: a non-currency that can only be spent at one location, expires after a certain time, limits returns and purchases, and is a hassle to use. With this litany of limitations, it's certainly not worth an equal amount in cash, yet that’s what consumers willingly pay for gift cards. This disconnect begs the question: considering the methods of depreciation, how much is a gift card actually worth? (TL;DR: About 68% of its face value)

Let’s say we have a $100 gift card to Outback Steakhouse. To determine its maximum cash value, we’ll look at how much it’s worth on the open market using best-case numbers and then how much it’s worth in its intended “closed-loop” use at Outback. For it to be a worthwhile purchase, we should be able to get maintain the $100 worth of value, or close to it.

Sell It

Selling gift cards has become big business on sites like CardPool. Easily-flipped cards for a handful of major retailers retain a lot of their value—Wal-Mart returns $0.91 on the dollar -- but even with this best-case scenario of the perfect store and offer, we've lost 9% of the value needlessly. Furthermore, we don’t have a Wal-Mart gift card in our example; we have an Outback Steakhouse gift card, which is worth—at best--$75.50. Yes, we can redeem it for other gift cards, but each exchange incrementally lowers the previous value, so we take the best offer of $75.50 and lose 24.5% of the value of the card right away.

Depressed by that number, you might think you can find a better deal than I can, so you scour Google for a half an hour. Thirty minutes later, you're displeased to learn that I'm right and you go back to CardPool. The checkout process to sell a card can be complicated, and as you peruse the options, you quickly spend another half an hour preparing the card for physical mailing and inputting the payment information. The lowest federal minimum wage is $7.25 an hour, so you’ve just invested at least another $7.25 against the cash value by researching and selling it.

All told, to sell your card (and this is with a relatively high-value card like Outback) you forfeit a stunning $31.75, leaving the actual value at $68.25.

Use It

After considering what a terrible deal it is to sell the gift card, you decide it’s better to enjoy the steak dinner at Outback with a few friends in the hope of spending exactly its value. We know that the average cost-per-person of eating at Outback is $20, thus you and your three friends have dutifully run up an $80 bill. Tack on the median sales tax of 6.9% and your bill is now $85.52. Being the generous tipper you are, you leave 20%: $17.10, putting your total at $102.62. All told, your out-of-pocket expense is a respectable $2.62. Even in this otherwise perfect scenario, you still spent some money, and that was with a gift card of over twice the average amount, three Outback-loving friends, and an average sales tax. Most importantly, you remembered to use the gift card. 20% - 50% of recipients don't.

Us It (Realistic Version)

Moving slightly away from the dream scenario and into actual usage numbers, the average gift card amount is only between $21 and $50, so we’ll take the average of those in our real world example: $35.50. With less to spend, you invite just one friend to join you at Outback, but the average cost is still $20 per person, which leaves you with two choices: don't get the same thing as you ordinarily would, thus devaluing the experience, or pay out of pocket (as 72% of people using gift cards do). Throw on a more realistic sales tax like Illinois’ 8.64%, and this puts your pre-tip bill at $43.45. Add your renowned generosity of a 20% tip, and your total bill comes to $52.14. This leaves you with an out-of-pocket expense of $16.64 and the net value of the gift card at $18.86, or 53% of its original value—a forfeiture of 47% of its face value. Selling the card, as a reminder, forfeited "only" 32% of its value.

In Conclusion

To put this incredibly low return rate into perspective, the average tax rate in the United States in 2014 was 31.5%. Unlike our tax dollars, which are used for all sorts of reasons, the value loss of gift cards benefits a single category: corporate profit. How are profits so high for gift cards? Because we don’t use them: they’re only redeemed at a rate of 50% – 80%, meaning up to 50% of the time, a gift card is a handout of free money to companies and their distributors to the tune of $750 million a year.

In light of these statistics, is there a time and place for gift cards? Yes, but only when the following circumstances exist: it’s from a store where the recipient shops regularly, and the amount of the gift card is small enough to reduce a purchase’s cost without leaving a surplus on the card or inciting a larger purchase. Gift card fees, even with the consumer safeguards of the 2009 Credit CARD Act, quickly gobble up unused balances. Ultimately, if your number one priority is the convenience, it's tough to beat the gift card. However, if you want to give a gift that provides the biggest bang for your buck--or at least an equal amount of bang for your buck, pull out the checkbook and start writing. Sorry, mom.