Buying Christmas gift cards with a credit card

Planning on buying gift cards this Christmas? Here’s what you need to know if you pay for them with plastic.

With shops packed full of decorations, festive displays and people on a mission to get all their shopping done, finding the perfect Christmas present for someone can be a challenge. By providing both flexibility and convenience, gift cards have become a popular alternative to generic presents or cash, with the industry now worth around $2.5 billion annually.

According to research from finder.com.au, the average person will spend $308 on gift cards for Christmas in 2016. Of those planning to buy gift cards as Christmas presents, almost 1 in 3 (27.61%) plan to use a credit card to pay for them. But there are specific conditions around buying gift cards with a credit card that could make this present worth a lot more than the price tag suggests.

Here, we look at the common fees and restrictions that can apply when you buy gift cards with a credit card, and what you can do to avoid them when you’ve got gift cards on your Christmas shopping list.

What you need to know about buying gift cards with a credit card

While you can buy gift cards with just about any piece of plastic in your wallet, on a credit card these purchases are usually processed as "cash advance transactions". This is because gift cards provide a specific dollar value to the purchaser or recipient, making them equivalent to getting actual cash with your credit card.

So why does this matter when it comes to gift cards? Well, if the transaction is processed as a cash advance, you’ll be dealing with a different set of rules, rates and fees to regular purchases.

What happens when a gift card purchase is processed as a cash advance?

Here’s what usually happens if your credit card provider processes gift card purchases as cash advances:

  • You’ll be charged a cash advance fee. Cash advance transactions typically attract a fee worth 2–4% of the total purchase. So for a gift card worth $100, you’d pay an extra $2–$4 using your credit card.
  • Interest will be charged immediately. Cash advances aren’t eligible for any interest-free period, so interest on these types of transactions accrues from the time they are made. The cash advance interest rate on most credit cards is also higher than the purchase rate (usually around 20% to 22%), so you could end up paying more for your gift card than if you’d bought something else for the same retail cost.
  • No rewards. Cash advance transactions usually don’t earn points per $1 spent or count towards any bonus point offers you may get with a new rewards credit card.
  • Your transaction won’t be eligible for a 0% purchase rate. Cash advances aren’t eligible for any promotional purchase rate offers. So even if you have a 0% purchase rate credit card, you’ll have to pay interest at the cash advance rate when you use it to buy Christmas gift cards.
  • Payment allocation. Credit cards issued after 2012 allocate repayments to the debt that attracts the highest interest rate first. If you have a credit card offering 0% on purchases and you use it to buy gift cards, any payments you made will go towards the gift card balance first. This could mean you end up with debt from your purchases at the end of the 0% interest period, resulting in even more interest charges.

How much would it cost to buy a gift card with a credit card?

Let’s say you plan on spending $500 on gift cards this Christmas. If you used a credit card that charged a 3% cash advance fee, an extra $15 would be charged to your account at the time of the transaction. This would bring your total spend to $515.

If your credit card charged 20.99% p.a. for cash advances, you’d also be charged around $9 in interest per month (assuming you didn’t make a payment towards your card during that time). That works out to be an extra $24 you’d spend on gift cards, or 4.8% of the original $500 in value.

To put this into perspective further, it would take you 2 years and 11 months to pay off the balance, and cost a total of $690 in interest if this was the only balance on your credit card and you made minimum payments.

Tips to avoid credit card restrictions when buying Christmas gift cards

If you’re planning to buy gift cards this Christmas, make sure you consider the following factors before putting these purchases on credit.

  • Check the definition of a “cash advance”. Each credit card provider has a slightly different definition of a “cash advance transaction”. While most providers specify that gift card or prepaid card purchases and payments count as cash advances or cash equivalent transactions, it’s important to read the Product Disclosure Statement for your card so that you know exactly what applies if you use it.
  • Redeem gift cards using reward points. If you have a rewards credit card, you could use the points you’ve already accrued to redeem gift cards for people. This gives you a way to save on upfront expenses around Christmas. You can read our reward points currency comparison guide to see the amount of points required to redeem a $100 gift card through different programs, or check with your credit card provider directly.
  • Pay for gift cards with a debit card or cash. A debit card that’s linked to your bank account or actual cash won’t attract additional fees for this type of purchase. So even if you’re using your credit card for most of your Christmas shopping, it may be a good idea to keep your debit card or cash on hand for any gift card purchases.
  • Separate your purchases in-store. Gift cards are often displayed near the checkout at supermarkets and in department stores, making them easy to grab as a last-minute addition to your other purchases. If that’s the case, you can avoid credit card fees and charges by asking the staff member serving you to process the gift cards as a separate transaction. This allows you to pay for your regular purchases with a credit card, and get the gift cards using a fee-free option such as a debit card or cash.

Are gift cards worth it?

Although gift cards are a present that allows the recipient to buy whatever they want, they can also be an expensive waste of money. According to data from Consumer Affairs Victoria, up to a third of all gift cards given at Christmas end up unused before they expire.

The government department says that it receives the most enquiries and complaints about gift cards around Christmas time, usually when people remember they were gifted with a card for the previous year and then find it’s expired. To avoid contributing to the hundreds of millions of dollars Australians end up wasting on unused gift cards, make sure you consider the following:

  • Check the expiry date. Most gift cards have expiry dates of between 12 and 24 months from when they are purchased. But be sure to read the terms and conditions for individual cards before you buy them, and let the person you’re giving the card to know.
  • Set a reminder. If you’re given a gift card as a present, make sure you take note of the expiry date. You may even want to set a reminder on your phone, or write it on a calendar to ensure you use it while it’s valid.
  • In-store or online payments. Gift cards come with their own terms and conditions around how you can spend them. While some cards might limit spending to in-store transactions, others might offer online redemption, and some could be used for both types of purchases. Think about these conditions before you buy a gift card for someone, so that you can choose an option that fits with their spending habits.
  • Gift card acceptance. While giving someone a gift card for a particular store or brand can be thoughtful, it can also limit how the receiver uses the money. This makes it important to consider what stores or brands they’re likely to visit before choosing a gift card. If you’re unsure, choose a card that’s accepted in several stores. For example, Westfield gift cards can be used in many participating retailers at Westfield shopping centres. Similarly, WISH gift cards or Coles Group and Myer gift cards can be used in a variety of different stores.

While gift cards make convenient and practical Christmas presents, paying for them on credit can attract extra fees and restrictions. But if you keep this in mind during your Christmas shopping, you can swap your credit card for cash or debit to help keep your spending as affordable as possible.
Images: ShutterstockBack to top

Amy Bradney-George

Amy is a senior writer at finder.com.au with more than 10 years experience covering credit cards, personal finance and various lifestyle topics. When she’s not sharing her knowledge on money matters, Amy spends her time as an actress.

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