How Gift Cards Work in the United States

What Is a Gift Card?

A gift card is a prepaid payment card that holds a pre-loaded monetary value. Instead of cash or a check, gift cards allow the giver to load a fixed dollar amount that the recipient can spend at one or more merchants. In the United States, gift cards are sold at retail stores, online, and through financial institutions.

Gift cards are extremely popular — according to data from the National Retail Federation, gift cards have been the most requested gift for over a decade. Americans spend well over $160 billion on gift cards annually. Despite this popularity, many consumers remain unfamiliar with the rules governing gift cards, including important federal protections.

Types of Gift Cards

There are two main categories of gift cards sold in the United States:

1. Closed-Loop (Retail Store) Gift Cards

Closed-loop gift cards can only be used at a specific retailer or family of retailers. For example, a card for a particular coffee chain can only be used at that chain's locations. Common examples include cards for department stores, restaurants, gas stations, and online retailers.

• Can only be used at the issuing merchant or its designated partners
• Usually have no activation fee (though some do)
• Cannot be used at ATMs or for general purchases
• Issued by the merchant directly or a program partner

2. Open-Loop (Network) Gift Cards

Open-loop cards carry a major payment network logo (Visa, Mastercard, American Express, or Discover) and can be used anywhere that network is accepted — essentially millions of merchants worldwide, both in-store and online.

• Can be used at any merchant that accepts the corresponding payment network
• Typically sold at grocery stores, pharmacies, and convenience stores
• Usually have a purchase fee (typically $3–$6) added at the time of purchase
• May have monthly inactivity fees after a period of non-use (subject to federal rules — see below)
• Some are reloadable; most single-purchase versions are not

3. Digital / E-Gift Cards

Digital gift cards (also called e-gift cards or virtual gift cards) are delivered electronically — via email, text message, or a merchant's mobile app — rather than as a physical card. They contain the same essential information: a card number, a PIN or security code, and typically a barcode or QR code for in-store use.

• Delivered instantly, making them popular for last-minute gifts
• Can be used online or (using a barcode/QR) in stores
• Carry the same balance-check and fraud risks as physical cards
• Should be stored safely — if the email is forwarded or the barcode shared, someone else could use the funds

4. Reloadable Prepaid Cards

Reloadable prepaid cards are technically different from standard gift cards, but they look similar. They allow the cardholder to add funds repeatedly and are often used as an alternative to a bank account. These may be subject to different fee structures and regulations than standard gift cards.

How Gift Cards Are Activated

Activation is the process by which a gift card is "turned on" — connected to its monetary value and made ready for use. Understanding how activation works helps you avoid common problems.

Point-of-Sale Activation

Most retail gift cards are activated at the cash register when purchased. The cashier scans the card, you pay the face value (plus any applicable fees), and the card is activated at that moment in the store's system. The card has no value until this step is completed.

Online Activation

Some gift cards require you to register or activate them on the issuer's website before use. This is common for Visa/Mastercard open-loop cards. The activation instructions are printed on a sticker on the card or included in the packaging. You typically provide the card number, expiration date, and security code — exactly as you would when shopping online.

What to Do If a Card Isn't Activated

If you receive a physical gift card that was not properly activated at the point of sale, return to the store where it was purchased with your receipt. The cashier can activate it or replace it. Activation issues are one of the most common problems with retail gift cards and are generally straightforward to resolve with a receipt and the original card.

Fees: What the Law Allows

Federal law — specifically the Credit CARD Act of 2009 — provides important protections against unreasonable gift card fees. Here is what you need to know:

Note: These federal protections apply to gift cards sold to individuals for personal use. Certain cards sold for loyalty or promotional programs may be exempt. State law may provide additional protections. Always read the terms and conditions that come with your card.

Using a Gift Card

In-Store Purchases

Present your gift card to the cashier at checkout — or swipe, tap, or insert it like a debit card, depending on the card type. Tell the cashier the amount if you want to apply only part of the card's balance to a purchase. Most merchants can split a transaction between a gift card and another form of payment.

Online Purchases

Enter the card number, expiration date, and security code (if applicable) at checkout, just as you would a regular credit or debit card. For open-loop Visa/Mastercard cards, you may need to register a billing address with the card issuer before using it online. This is done on the issuer's official website.

Partial Redemption and Remaining Balances

When you spend only part of a gift card's balance, the remaining amount stays on the card for future use. Keep track of your balance — the receipt typically shows the remaining balance after each transaction, and you can always check your balance through the official channel printed on the back of the card.

If the Purchase Exceeds the Card Balance

If your purchase total is more than the card balance, you'll need to pay the difference with another payment method. This is called a "split tender" transaction. Most merchants can accommodate this, but some smaller merchants may not. It's a good idea to know your balance before shopping.

Lost, Stolen, or Damaged Cards

What happens when a gift card is lost or stolen depends largely on the card issuer and whether you registered the card.

• Registered cards: If you registered the card (provided your name and address on the issuer's website), you may be able to report it lost or stolen and receive a replacement with the remaining balance.
• Unregistered cards: Unregistered gift cards are treated like cash — if lost or stolen, the balance may be unrecoverable. The issuer is not obligated to replace an unregistered card.
• Damaged cards: If a card is physically damaged (bent, demagnetized, water damaged), contact the issuer. Many issuers will replace a damaged card if you can provide the card number, which may be readable even if the card no longer scans.

Summary

• Gift cards come in closed-loop (store-specific) and open-loop (Visa/Mastercard) varieties, as well as digital versions.
• Cards are activated at the point of sale or online — only through the official issuer's website.
• Federal law protects your balance from expiring for 5 years and from inactivity fees for 12 months.
• Keep your receipt and register your card when possible for maximum protection.
• Always check balances through the official channel on the back of the card — never through third-party websites.

Next: How to Check Your Balance Safely →