Gift cards aren't just for gifting anymore.
People are buying gift cards for less than face value and using them for everyday purchases. It can be a great way to get automatic discounts at places you shop regularly -- as long as you're organized about using the cards and understand potential drawbacks.
"Gift cards are the new coupon," said Donna Freedman, a frugality blogger at MSN Money and deal expert with Savings.com.
Typically, gift cards, or stored-value cards, are inferior to cash. That's because you generally can use them only at their namesake retailers. Cash is good anywhere. So a smart consumer will need incentive to convert superior cash into gift cards. That bonus comes in the form of a discount on buying gift cards or an extra amount loaded onto the card.
For example, at online card-swap sites, you recently could buy a $200 CVS Pharmacy gift card for $188 or a $25 Regal Cinemas gift card for $22.
"I've been using discounted gift cards as currency for the past few months," Freedman said. "I've taken people out to lunch, had my hair cut, bought groceries and seen movies at discounts of 3 [percent] to 12 percent."
It's clear that more consumers are buying gift cards to spend on everyday purchases, said Luke Knowles, founder of GiftCardGranny.com, a website that aggregates deals posted on gift card swap sites. "It's happening quite a bit," he said. "That is what most people are using them for, rather than gifting."
Knowles said that traffic at his site has soared by 10 times during the past year and that the average number of available gift cards has gone from about 1,500 to more than 21,000. He estimates that a consumer regularly using discounted gift cards could save $2,000 a year.
Here's what you need to know about the gift card shuffle:
*The discount: Discounts come either directly from retailers as a marketing promotion or from people who sell unwanted gift cards for less than the value on the card. Typically, people sell cards because they would prefer cash and are willing to accept a lower dollar value.
"With discounted gift cards, I can continue to live the way we already enjoy and get an average of 10 percent off everything," said Ashley Grimaldo, 31, a mother of two in Bryan, Texas. Grimaldo, in conjunction with a promotion by GiftCardGranny.com, pledged to live off only discounted gift cards for a month. She figures she'll save $150 to $200, compared with spending cash. "It's a pretty good return for not much work," she said.
*Get a good bonus: If you're going to endure the hassle of converting cash to gift cards, make sure it's worth it. A 5 percent bonus, but preferably 10 percent, starts making it worthwhile. But discounts vary widely. Some offered by retailers are lucrative. For example, Best Buy recently sold $50 iTunes gift cards for $25. And group-buying site LivingSocial.com recently offered a $20 Amazon.com gift card for $10.
Cards offered by swap sites provide varying discounts, depending on the popularity of the card. Cards that everybody can use -- for gas stations or supermarkets, for example -- will be sold for closer to face value than gift cards to specialty retailers. For movie tickets, look for discounts of 20 percent to 25 percent; restaurants, 10 percent to 15 percent; and gas, 5 percent or less, Knowles said.
Of course, even small discounts on big expenditures can be worthwhile. If you're spending $5,000 at Home Depot to remodel your kitchen, paying with gift cards discounted only 8 percent yields $400 in savings.
*Shop for cards: Several online brokers allow people to sell unwanted gift cards, making them available for less than face value. Examples are plasticjungle.com, cardpool.com and giftcards.com.
Instead of shopping at each site individually, you can go to an aggregator, such as GiftCardGranny.com. Typically, consumers can get free shipping on gift cards and no sales tax. At GiftCardGranny, you can set up alerts to notify you by e-mail when a hard-to-find card you're interested in becomes available.
Warehouse clubs often offer a few discounted gift cards. Online auction site eBay often offers the biggest discounts, Grimaldo said. Rewards credit cards sometimes let you cash in rewards points for gift cards that cost less than the cash-back equivalent. For example, you might spend $40 worth of rewards points to buy a $50 gift card to Banana Republic. Chain drugstores often will offer a free gift card for switching your prescription to their pharmacy, said Teri Gault, chief executive officer of TheGroceryGame.com.