Why Your Brain Wants to Waste That Gift Card

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Over at SmartMoney.com, I’m going to be doing some columns on Money & Your Mind. Here’s my first, out today, on changes to the laws governing gift cards and why they’re actually going to make you more likely not to redeem these popular holiday presents:

Gift cards have always been an unhappy medium: more thoughtful than cash, less thoughtful than an actual gift. But with recent changes to the laws governing these products, restricting fees and expiration dates, gift cards are about to become less thoughtful than ever.

How is giving consumers more time to use a gift and stopping companies from nickel-and-diming them in the meantime bad for consumers? Because the real problem with gift cards isn’t that you have too little time to redeem them — it’s that you have too much.

Last year, Americans spent $92 billion on gift cards, according to TowerGroup, a research firm owned by MasterCard Worldwide. According to Nielsen, they’re the No. 1 product consumers expect to spend more on this Christmas than last. But of the $92 billion spent last year, $6 billion was lost to fees and expiration dates and simple failure to use the cards, according to Tower.

Thus, in one of the lesser-known provisions of this May’s Credit Card Act, Congress put new restrictions on gift cards issued by banks and credit-card companies. Among other changes, the act banned expiration dates sooner than five years after a card is purchased and disallowed fees on cards that have been dormant for fewer than 12 months. The new regulations don’t take effect until next summer, but some companies, such as American Express, are making changes now. Store cards, meanwhile, have been lowering fees and phasing out expiration dates for years, in response to state laws.

While these are intended as pro-consumer reforms, they’re based on a misunderstanding of the real problem with gift cards: You lose money on them not primarily because of fees or expiration dates, but because you throw them in a drawer and forget about them. Or, you lose them, or you hold on to them indefinitely — always thinking you’ll redeem them tomorrow.

It’s counterintuitive, but the way to make people more likely to redeem their gift cards would be to shorten the time before they expired.

With much inspiration from Virginia Postrel’s May Atlantic story, which I blogged about here.