Penny auction sites love to tout the incredible deals that customers walk away with, but the reality is far less pleasant.  For every person that gets a great deal on an item, there are tens or hundreds, possibly thousands that spend money to bid that they can’t get back.

Well, their credibility has taken a further blow with reports (like this and this) that some of these sites are using auto-bidding bot software to bid up the auctions, thus costing all those that participate more money.

Don’t be lured by these phony deal schemes.  If you want a discounted gift card, purchase one from one of the many legitimate secondary marketplaces, like GiftCardRescue, Plastic Jungle, or CardPool.

My wife and I rarely pay attention to our credit card reward points and were surprised recently to find that we had over 200,000 points saved up.  Because of some recent reports of banks like Chase reworking their rewards programs and heavily discounting points so they are worth only a fraction if what they were, we decided it is probably a good idea to use up our points now.

I found an item that I wanted, a new Canon EOS SLR camera that would have cost about 140,000 points.  Just to be thorough, I decided to see how I might benefit from purchasing Amazon.com gift cards instead and purchasing the camera on Amazon.com.  The camera retails on Amazon.com for just under $700 and I was able to purchase $700 worth of Amazon.com gift cards for just over 100,000 points, a nice discount.

I had no trouble adding each card to my Amazon.com account (9 cards total) for a credit, and then purchasing the camera using that credit.  Since I buy so much stuff every week/month/year from Amazon.com, having an Amazon.com gift card is about the same as cash for me, very convenient.

Interestingly enough, if I wanted to change my reward points into actual cash, none of the major gift card secondary marketplaces will buy Amazon.com gift cards.   But my rewards program offers many types of gift cards and it is easy to find one that can be sold.  For instance, a Toys “R” Us gift card can be sold for about 80 cents on the dollar.  In my case, getting Amazon.com gift cards is a better value because I will actually use them very quickly.

One other note:  I might have been discouraged from buying too many Amazon.com gift cards from my rewards program as the selector that allows me to chose the number of a given gift card denomination was limited to a maximum of five.  However, after having purchased the maximum amount allowed, I was able to go back a few days later and purchase five more of the same denomination.

Bulk purchasing of gift cards is a common activity for businesses, to use for rewarding outstanding employees and for en-mass holiday employee gifts.  Despite my frequent rant that gift cards, if misused, can be quite the thoughtless gift, I do think there are good reasons companies can use them to reward employees.

But it might come as no surprise that very few retailers offer discounts on bulk gift-card purchases.  Whether you buy $100 worth or $5,000 worth, you will likely pay full price.

However, one of the gift card secondary marketplaces, GiftCardRescue, is now offering some bulk discounts on gift card purchases.  You have to contact them to get information about what types of cards are available with bulk discounts, and from the sound of the press release, they may not always be available.

To date I have not seen any other secondary marketplaces offer these type of discounts.

We’ve again updated our gift card resources page, which lists every gift card secondary marketplace we’ve ever seen, and a few more sites have hit the dead pool.

Mercardi:  They’ve closed their doors and a message on their site recommends people go to Plastic Jungle.

Update:  They may have endorsed Plastic Jungle as their successor, but that hasn’t stopped competitor GiftCardRescue.com from offering a 5% discount to Mercardi users, or anyone who uses the code MERCARDI until Friday 9/3.

DFWbid.com:  I’ve never quite understood the penny-auction phenomenon, where people pay to bid on items by buying credits, which are lost if they don’t have the winning bid.  To assuage the frustrations of many of their customers, most penny-auction sites started allowing people to apply credits spent on an auction to buying the item at full retail price.  According to a Business Week article, this practice has sliced the margins considerably making it a much less profitable business, and customers otherwise have cooled to the type of marketplace as traffic at the three largest penny auction sites are down 40-60% in the first half of this year.  It was bound to happen and I suspect customers have wizened up.  In any event, this gift card focused penny-auction site appears to be dead.

The Island of Misfit Gift Cards:  AKA discount-gift-cards.info.  One of the many sites of questionable value, it simply listed gift card auctions on Ebay.  Apparently even their low overhead wasn’t enough to keep them in business.

Open-loop (Visa, MasterCard, American Express, Discover) gift cards can be very difficult to use successfully.  In my last post, I discussed how some of their limitations and how to best use them for online purchases.  In this post, I’ll discuss how to best use them for in-person purchases at retail establishment.

If you have a particular retailer in mind to use a gift card at, whether for yourself or someone else, closed-loop gift cards (Target, Wal-Mart) might be a better choice as virtually none of the open-loop gift card issues (like fees and verification) exist for closed-loop cards, and they are often available at a discount.

In-person purchases

Using these cards in-person can be tricky in many situations.  First, be aware that purchases at restaurants and gas stations are treated differently than most other purchases.

When you want to buy gas at the pump at a gas station, the gas station will automatically put a $50 or $75 hold on your card before you pump gas.  If your card does not have enough for the hold on it, you are out of luck, and won’t be able to use the card at the pump.  You may be able to present the card to the cashier, explain the situation, and pump gas as you would with a cash purchase.  However, be prepared to cover the purchase with cash if it doesn’t work, especially if you tried it at the pump first, because of authorization holds as we explained in part 1 of this series.

You may also run into problems using gift cards that have not been registered at gas stations, and specifically at the pump, because the majority of gas stations now require you enter your billing zip code.  If you plan to use your gift card at a gas station, and have considered the $50/$75 hold issue, register your card first and use the zip code of the address you registered.

When you want to pay for a meal at a restaurant, most restaurants point-of-sale (POS) systems will automatically place a hold on the amount of your bill, plus an additional 20% to make sure you have enough available credit (or funds in the case of debit cards) for a tip.  If you want to pay for a $50 meal with a $50 gift card, and pay the tip in cash, you are out of luck as the card will be rejected as the system will attempt to authorize it for $60.  You could always ask the server to put $35 of a larger bill on a $50 gift card and then fill in the rest as part of the tip.

Other than gas stations and restaurants, most other merchants should have few problems with open-loop gift cards as long as you are aware of your balance, are sure there are no holds on your funds (from failed purchase attempts that have not cleared) and are not trying to purchase using a split-tender transaction, a special kind of gift card problem.

When you use a closed-loop gift card (like Target), almost all retailers POS systems are capable of (a) checking the balance on the card, and (b) applying the remaining balance on the card to your purchase and then applying another type of payment to the remainder.  This is called a split-tender transaction.

However, with open-loop gift cards, merchants are not able to check your remaining balance (except in a few rare cases) and most cashiers have not been properly trained in split-tender transactions, if the POS system is even capable of doing one.  That is the main reason that open-loop gift cards are so frustrating, because getting the last few bucks off of the card is very difficult.  I have yet to find a retailer, online or brick-and-mortar that says they support split-tender transactions.

MasterCard and Discover have recently introduced new merchant requirements that will solve many of these problem, like holds, balance checking, and split-tender transactions, but it will be a year or more before those fully take effect.

This post by giftcardadvocate.org originally appeared in the Plastic Jungle Blog.

An often overlooked positive feature of an open-loop gift card is that it has limited funds, and when used for online, or even offline, purchases, limits your exposure to fraud or other undesirable consequences.

One very common such undesirable consequence are free trial subscriptions that convert into a recurring paid billing after the free trial period, typically 30 days.  We often forget to cancel the subscription before the first billing happens, and companies know this, which is why they structure trial offers this way.

For instance, I recently tried out GoToMyPC, which offered a 30 day free trial, but required me to enter a credit card number for monthly billing after the 30 day trial period.  By using a gift card with a balance sufficient to pass their authorization (one months billing) and then spending the balance on the card, I’ve insured that I won’t be billed excessively for something I just wanted to try out.  Even if I forget to spend the balance on the card in time, I’ve limited my loss potential to the balance on the gift card.

By design, it is impossible to tell a gift card from a credit card, so as long as your gift card passes authorization (a process which we will discuss in an upcoming series on using gift cards for online and offline purchases), the company has no way of knowing that you are protecting yourself with a limited funds card.

I’ve often criticized gift cards as being impersonal and not always an appropriate gift and was ever so reminded of this when I came across a gift card promotional ad recently:

Visa Gift Cards make great anniversary gifts because they can be used in millions of places around the world. Give an anniversary gift card so the happy couple can use it to celebrate! Or buy a gift card for your husband or wife to celebrate your anniversary in style.

Choose from our anniversary gift card designs or opt to upload a picture and create your own personalized gift card for a unique gift.

Now, a suggestion to give a gift card to your wife as an anniversary gift is, to say kindly, a bad one.  I know my wife would seriously frown on such an impersonal gift for one of the most personal of occasions.  Plus, she knows that my money is our money (her money) anyways and giving her a gift card would be about the same as wrapping up something around the house as an anniversary gift.

Not a good idea.

On the other hand, the best occasion I can think of to give someone a gift card is to a couple that has just had a baby.  In particular, we have taken to giving a gift card or gift certificate to a restaurant delivery outfit that delivers from multiple local area restaurants.  Most areas have them.

If you’ve had kids, you know that the first few weeks are a little hard after a baby is born, especially for the first baby, and cooking a good meal is not always possible.  While it is nice the people often bring over meals to the new parents, sometimes it is nice to be able to pick up the phone and order something.

The following is a guest post written by Judd Lillestrand, founder of ScripSmart, a website dedicated to simplifying gift cards. In it, he offers tips for merchants selling gift cards. The views expressed are his own.

We do a lot of research on gift cards at ScripSmart. When adding a new gift card to the site for scoring, our first stop for information on the program is the the merchant’s website. Surprisingly, the range of information disclosed varies greatly from merchant to merchant. Here’s a list of 10 points we’d like to see every business who sells gift cards disclose:

1. Gift Card Terms – A dedicated webpage to communicate the current terms and conditions of the gift card program. The Terms should cover many of the points listed below. See Target’s Gift Card Terms for a good example of a simple, yet comprehensive Terms webpage and Apple’s iTunes Gift Card Terms for a more lengthy version.
2. Prominently Discloses Fees and Expiration – And if there are no fees or expiration dates, use it as a selling point by touting the ‘No fee, No Expiration’ on the same page where customers can buy the gift card. I see companies miss this opportunity a lot and it’s a  simple fix. If you are selling a gift card with fees or an expiration date, let people know about it up front; it will save you a negative customer experience down the road.
3. Gift Card FAQ – Dedicate a webpage with common questions people ask about the program. This is often similar to the Terms webpage, but written in a consumer friendly manner. See Disney’s Gift Card FAQ for a good example. A good FAQ can save your company a lot of time and help make the potential customer feel comfortable with the purchase.
4. Balance Inquiry – What are the options for checking the balance: phone, online, in-store? Don’t just refer to the back of the card for more details, such as the phone number.
5. Replacement Policy – If a gift card goes missing, is it replaceable? If so, what does the gift card holder need for a replacement? Include contact information for the group responsible for managing such requests.
6. Usage Restrictions – Are there any restrictions for use? If so, disclose them all. Some examples we see: accepted at participating  locations, not valid for shipping, not valid for payment on a charge account, not accepted in-store, and so on.
7. Return Policy – Can gift cards be refunded for cash? Also, if an order paid for with a gift card is returned, how is the money transferred to the customer? For example: back on the original gift card, store credit, or cash refund.
8. Also Redeemable At – Is the gift card redeemable at sister brands? If so, let customer know about it and position it as a selling point.  TJ Max, I’m looking at you.
9. Required For Redemption – Is anything else required for completing a purchase with a gift card. For example, the Amazon.com  Gift Card requires a valid credit card to complete the purchase even if the balance of your gift card coves the order total.
10. Card Issuer – What legal entity issues the gift card and what state is the company incorporated under?

Being upfront with your customers will pay dividends in the long run. If you believe disclosing information about the program will hamper gift card sales, it’s time to consider changing the program to make it more appealing for your customers.

Best Buy sure doesn’t get open-loop gift cards. It is one thing to make a single horrendous mistake and have someone arrested when they are simply trying to use valid American Express gift cards.  But hearing another story like the following one makes me think that Best Buy simply isn’t the place to use any open-loop gift cards.

I bought a Wii Fit Plus and a Wii set using gift cards I received for my birthday.  These are American Express and Visa Gift Cards.  When the cashier took the gift cards, he never returned them to me.  I didn’t think that was not normal since I rarely use gift cards.

Well, I decided that the Wii and Wii Fit Plus set was not for me so I returned it (unopened, in mint condition – after only a few days).  This is what I got from the folks at customer service.

“We can only refund American Express Gift Cards directly to the Gift Card itself.  The sales person shouldn’t have taken it from you.  Since you don’t have the Gift Card anymore, we can only issue a BEST BUY Store Credit! And if you use Visa or Mastercard Gift Cards, you can only get a store credit regardless.“

Now, that was not my issue.  The issue that they cannot refund me the value in cash for gift cards is absurd, specially if their own salesperson took it from me.  I was very disappointed.

I just discovered that GiftCardRescue buys open-loop gift cards.  They have been doing so since 2008, but I just noticed recently.

As far as I know (and they agree) they are the only secondary gift card marketplace to offer to buy any open-loop cards.  Discover cards are not included, but those are rare.  They will buy any non-reload-able card from any issuer, that has not yet been registered to a person.    They resell the cards on their site for a 4-7% discount.  Because you are not paying the additional up-front fee, this amounts to more like a 10+% discount, a real bargain if you are looking to buy one of these cards.  This is a much better option than buying them new from a store.

This is a big deal, as those cards in particular have been a big part of the problem when it comes to high fees and short expiration dates.  Now consumers have at least one option to get rid of those cards before they self-destruct.  It remains to be seen whether the federal gift card legislation as part of the Credit Card Reform Act of 2009 will truly squash these fees and expiration dates, or whether many loopholes will be exploited.

Another option to cash out of open-loop cards is to find a friend with a merchant account to run it through their physical or virtual card processor to extract the remaining value.  The merchant processing fee runs around 3% for most merchants.

I’ve often promoted that cash is a better alternative gift than gift cards, and here is a way to make a statement with your cash, the Consumerist anti-gift card.

Click here for the full-sized image to print out and include with your gift of cash.

MasterCard and Discover have new requirements that merchants who accept those cars support some new capabilities that could have a very beneficial effect on open-loop gift card usability.  Specifically:

Balance response transactions — For prepaid and gift cards, once the card has been used, the remaining account balance will be transmitted along with the authorization response. The remaining balance must be printed on the customer receipt, displayed on the Web page or point-of-sale terminal, or both.
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Partial authorization transactions — When a customer’s transaction amount exceeds the balance available on their debit, prepaid or gift card, instead of declining the transaction, a partial authorization for the amount available to the customer will be returned. This will allow the customer to pay for the remaining amount with another form of payment. This is called a split-tender transaction.
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Authorization reversals — An authorization reversal is a real-time transaction initiated when the customer decides that they do not want to proceed with the transaction, or if the merchant cannot complete the transaction for any reason. Authorization reversals free up the customer’s available balance on their debit, prepaid or gift card.

What this means is that:

1. You will know the remaining balance on your gift card after you purchase something.  I can only hope this eventually leads to all merchants being able to determine your balance before you purchase.
2. Merchants must support split-tender transctions, which would allow you to use the last $5.11 on your MasterCard gift card with cash or another credit card to buy something that cost more than that.
3. When you try to use your gift card to purchase something but it fails for some reason, funds won’t be held on your card for weeks.

Merchants have until June 30, 2011 to comply with these new rules.  I would say it is a coin toss that after that time these things will actually be possible given the industry’s track record.

Costco sells what are essentially gift cards, but they call them Costco Cash Cards.  You can buy them with a value anywhere from $25 to $1,000.

What makes them really valuable however, is that if you have a Costco cash card with any value on it whatsoever, you can shop at Costco without a membership.

How can you get them?  Have friend with a membership buy them for you, or some of the gift card resale sites carry them.

Incidentally, people selling these cards on Ebay obviously know about this benefit.  Otherwise, why else would they be selling these cards at more than their face value?