Although the Credit CARD Act of 2009, a new set of rules that make credit and gift cards more consumer-friendly was signed into law by President Obama in May 2009 and a majority of the provisions became effective as of February 22, 2010, a specific provision of the legislation focused on gift cards just recently went into effect on August 22, 2010.

Although the new regulations may be bad news for credit card companies, they are definitely good news for consumers as the holiday season approaches. The Act’s gift card provisions limit the amount of fees and penalties that retailers and credit card companies can charge gift card users and require the cards to remain active for at least five years.

Banks, credit card companies, and retailers have been issuing gift cards for years. Those cards have, however, included a lot of fees and penalties which ultimately lower the value of the card and could potentially drain it of all value. For example, many card companies penalized card holders for failing to use their cards within a specified time period by lowering the value of the card. Others charged customers’ cards for calls made to inquire about the gift card. These policies are now things of the past as the CARD Act explicitly prohibits retailers from charging these additional fees.

From now on, the only charge that card companies may place on a gift card in its first year of use is a purchase fee ranging from $1to $5. After that, a service or inactivity fee may only be charged if a cardholder has failed to use the card for at least a full year. Any additional fees or penalties that do not comport with the new regulations must be prominently displayed and the card issuer must provide a toll-free phone number and web address for inquiries.

Another big change involves the expiration date of the cards gift cards may not expire unless at least five years have passed. This may come as a surprise to those retailers that traditionally include annual expiration dates on their cards. Because the new law preempts any state law on the issue, the CARD Act’s expiration requirement will control. Those consumers living in states that already had stricter gift card laws than those required by the new regulations will, however, still benefit from the rules of their respective states. For example, if a state law mandates that gift cards may never expire, then a consumer within this state will not be limited by the five year expiration date imposed by the CARD Act and can enjoy the unlimited expiration date.

Some leeway was given to the card companies. Those gift cards produced prior to April 2010 may be sold without the newly required disclosures and information on them. The retailer must, however, disclose the hidden costs in other ways such as through prominent signage or stickers placed on or around the cards. These changes are expected to make gift cards an even more attractive gift option.

Arent Fox is monitoring this issue. For more details, please contact Anthony V. Lupo or Sarah Bruno.

Anthony V. Lupo
lupo.anthony@arentfox.com
202.857.6353

Sarah L. Bruno
bruno.sarah@arentfox.com
202.775.5760