Credit Card Reform Still Leaves Gift Card Booby Traps

(April 28) -- Some plastic fell through the cracks in the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009.

The CARD Act, which takes effect Aug. 22, puts longer-term value in some, but not all, plastic money gift giving. The new rules apply to gift cards with a MasterCard, Visa, American Express or Discover brand logo, which can be used wherever the credit card version of those cards are used.

It also applies to certain store gift cards used at certain retail establishments such as bookstores or department stores.

New rules include:

• Fewer use-it-or-lose-it fees. Nonuse, inactivity or dormancy fees can kick in only after a card has not been used for 12 months. After that point, issuers can charge only one such fee per month. That restriction also applies to fees for using the gift card, fees for adding money to the card and maintenance fees.

• More time to shop around. Gift cards cannot expire for a minimum of five years after the original issue or the last time funds are added to the account.

• A show-me-the-money-I-could-lose clause. Gift card issuers must disclose in "clear and conspicuous" terms information relevant to the gift card, including the level of inactivity fees after a year of nonuse, service charges, purchase charges, and other fees and terms of use. The card's expiration date must be clearly printed on the plastic itself.

New rules don't apply to:

• Reloadable prepaid cards with a MasterCard, Visa, American Express or Discover brand logo, which are typically used as an alternative to a bank account with a debit card. The cards are not marketed as gift cards but can be offered as a gift, say, from a parent to a student away at college. Consumers who don't qualify for or aren't comfortable using bank accounts or credit cards are also in the target market for prepaid cards, which can be used wherever the credit card version of those cards are used.

Not only does the CARD Act not cover reloadable prepaid cards but Consumers Union found only sketchy federal oversight of them. In February, consumer groups asked the Federal Reserve for greater regulatory protection for consumers using the cards.

CU, the independent, nonprofit publisher of Consumer Reports, late last year studied the carrying costs of reloadable prepaid cards. It found the "devil in the details" -- a host of fees, including fees for activation, nonuse, point of sale, cash withdrawal, balance inquiry, bill payment, transaction statement and even account closing.

Calling the reloadable prepaid cards a "shaky alternative to a bank account with a debit card," CU added up the two-month cost of 18 prepaid cards. Over the two-month period, for each account CU rang up an activation fee, monthly fees and fees for three ATM withdrawals, three bill payments, eight point-of-sale purchases, a weekly balance inquiry and two deposits.

Total monthly fees ranged widely, from $13.95 to $115 the first month and $18.90 to $32.75 the second month.

CU's report, "Prepaid Cards: Second-Tier Bank Account Substitutes," says that protection against theft of funds is sketchy, promises the cards can help build credit are questionable and Federal Deposit Insurance Corp. and Electronic Fund Transfer Act protection for cards can be unclear, limited or not available.

Also, small lines of credit attached to some cards can claim to come with a 150 percent annual percentage rate, but consumer use habits can push the APR to as high as 650 percent, making prepaid card lines of credit akin to the most expensive payday loans, according to CU.

• "Loyalty cards," or gift cards given as a reward or as part of a promotion. For example, a free $10 gift card from a store that can apply only to the cost of merchandise or services of $50 or more from the same store may have fees or an expiration date of one year rather than five years. The CARD Act says the cards must come with clear disclosures about expiration dates or fees.

• Prepaid phone cards. They are regulated primarily on the state level, but phone card regulation is spotty where it exists.

The Federal Trade Commission recently testified before Congress in favor of legislation to end deceptive marketing practices associated with prepaid phone cards.

Consumers complain they don't get the call time the card advertises -- in some cases, only half the advertised time -- often because of undisclosed or poorly disclosed fees and surcharges.

CU advises consumers not to overlook stronger state gift card laws, some of which provide greater coverage for all forms of plastic money and will remain in force after the Aug. 22 effective date for the new federal rules.