Rebate cards come with fees and other gotchas

January 12, 2010

SAN FRANCISCO, CA – If you got a rebate from holiday shopping this year, there’s a good chance it came in the form of a rebate card. More and more retailers are switching from issuing rebate checks to providing rebates on prepaid cards that look like gift cards. But rebate cards come with fees and other restrictions that can diminish their value, according to Consumers Union, the nonprofit publisher of Consumer Reports.

“The switch to issuing rebates on plastic is saving retailers money but consumers stand to lose out to a host of fees that can eat into their rebate savings,” said Michelle Jun, staff attorney with Consumers Union. “Consumers should be sure to read the fine print carefully when they get a rebate card to make sure they end up getting the full rebate they were promised.”

Exact figures are unavailable for the total amount of funds issued on rebate cards, but industry analysts estimate that it is in the billions of dollars. According to Mercator Advisory Group, $9 billion was loaded onto prepaid consumer incentive cards in 2008. Consumer incentive cards include rebate cards along with other incentive programs like sweepstakes and door prizes.

While rebate cards resemble gift cards, they aren’t governed by state laws and a new federal law that limit fees and quick expiration dates on gift cards. The Credit CARD Act of 2009 prohibits gift cards from expiring before five years from the date of purchase or when money was last loaded onto the card. Gift card issuers are barred from charging fees for the first 12 months. These federal gift card protections will go into effect in August and stronger state protections will remain in effect.

Rebate cards come in two forms: “closed-loop” cards that can only be used by the retailer that issues it and “open-loop” cards issued by Visa, MasterCard, American Express or Discover. These “open-loop” cards can be used anywhere the card network is accepted. In most cases, the only way to redeem the funds on a rebate card is to buy something else. Rebate checks, on the other hand, can be deposited into a bank account.

To help consumers avoid problems with rebate cards, Consumers Union issued the following tips:

Watch out for rebate card fees: Like other prepaid cards, rebate cards can come loaded with fees, including fees for activating the card, checking balances, inactivity, going over the limit, or replacing a lost or stolen card. Be sure to read the fine print when you receive a rebate card to become familiar with the fees you might be charged so you can avoid them.

Keep an eye on rebate card expiration dates: Many consumers have a tendency to hang onto gift cards instead of spending them right away. That could be a big mistake with a rebate card since it might expire quickly. Some rebate cards expire in as little as three months. The best advice is to check the expiration date when you receive a rebate card and spend it before it expires or you accrue other fees.

Know your balance and avoid problems at the check-out: Rebate cards can sometimes be difficult to use if the funds on the card don’t cover the full amount of the purchase. To avoid this problem, keep track of the balance on your card and ask the merchant to make a “split tender transaction” so you can use the rebate card and some other form of payment to cover the full amount. Unfortunately, not all cashiers know how to process these kinds of transactions, which can make redeeming your rebate card unnecessarily frustrating.

Be aware that your rights may be limited if your card is lost or stolen: When rebate cards are lost or stolen and used by others to make fraudulent transactions, consumers are not protected by the same regulatory and statutory safeguards that enable debit card users to recover their money. If a consumer contacts a card issuer about a lost or stolen debit card within two business days, the consumer’s liability is limited to up to $50 (or up to $500 if the consumer reports the debit card lost or stolen after two business days). By contrast, rebate cards may only have voluntary protections that could be revised or rescinded at any time for any reason.

“It’s time for the law to catch up with this latest form of plastic payment so consumers don’t end up losing their rebate savings to hidden fees and short expiration dates,” said Pamela Banks, policy counsel for Consumers Union. “The emergence of rebate cards is a perfect example of why we need a Consumer Financial Protection Agency (CFPA) so that government regulators can respond more quickly and effectively to problems created by new financial products.”

Last October, the House passed financial reform legislation that includes the creation of the CFPA, which would be charged with making sure that financial products and services are more transparent, fair and understandable for consumers. The CFPA will have the power to write and enforce rules, to fill the gaps under specific existing consumer protection statutes, and also anticipate and prevent harm to consumers from new products and practices. The Senate is considering a similar proposal.

More information about the proposed CFPA can be found at:
http://www.consumersunion.org/2009/06/cus_summary_of_the_consumer_fi.html

Michael McCauley or Michelle Jun – 415-431-6747