How Do Gift Cards Work

Gift cards have been a popular present option for decades, and with the rise of e-gift cards that can be delivered to recipients in seconds, gift cards have easily adapted to modern technology and remain as relevant as ever. Gift cards may be purchased for other people or for yourself; as a matter of fact, it’s becoming all the more common to buy gift cards for yourself to take advantage of savings and simplify the shopping experience. 

You’ll find an abundance of gift cards being exchanged between family and friends during holidays and other special occasions. Gift cards are the perfect size to fit neatly into a greeting card to give to relatives you haven’t seen in a while, or to surprise the picky teenage grandkid with. No matter who the gift is for, you don’t have to worry about making the wrong choice when it comes to gift shopping – a gift card takes the decision out of your hands. Surprises are certainly nice, but nothing beats having the ability to pick out the present you really want with a gift card. 

While you have probably given and received your fair share of gift cards over the years, have you ever stopped to think about how they actually work? 

It’s not an all too common thought, despite how often we use, give, and otherwise incorporate gift cards into our lives. We over at Gift Card Granny have decided to put together this helpful article offering insight into the mechanics of gift cards so that you can better understand this convenient form of payment. Even if you think you know your gift card facts fairly well, it couldn’t hurt to check out what this article has to say and freshen up your gift card knowledge so that you may spend with confidence. 

How Do I Use My Gift Card?

Using a gift card is a lot like using a credit or debit card, except you don’t have to worry about paying off a bill at the end of the month or having money taken from your bank account. When you swipe or scan a gift card during a transaction, the funds required to complete the payment will be deducted from the total value of the gift card. You may end up leaving the store with leftover money remaining on your gift card, or you may exhaust the gift card funds entirely – it all depends on the value of your gift card and the cost of your purchase. 

It is important to note that some gift cards will not work or may not be accepted at certain locations due to special restrictions. For instance, there are some businesses that cannot sell tobacco or alcohol to customers who wish to pay with a gift card. Other restricted items can include fuel, firearms, and lottery tickets. Closed-loop gift cards cannot be used to make purchases at merchants unaffiliated with the business that the gift card is for, meaning their funds are virtually worthless at any other store. 

Types of Gift Cards

There are two main types of gift cards that every consumer should be aware of and know the differences between. 


Most retail gift cards you encounter in your everyday shopping excursions will be closed-loop. These types of gift cards may only be redeemed at the issuing merchant or locations that accept the gift card as valid payment. Closed-loop gift cards are limited in their purchasing capabilities and can only be used in transactions at specific businesses associated with the gift card brand. 

When it comes to the cost of closed-loop gift cards, buyers typically only pay for the overall value of the gift card. There are no additional fees or operating costs that need to be covered by the customer in regards to closed-loop gift cards, which is generally not the case with open-loop gift cards. A closed-loop gift card is a reliable gifting option when you know the types of retailers and products your recipient likes to shop for. 

You can browse a variety of closed-loop gift cards available for purchase at Gift Card Granny. There are dozens of retail gift cards currently in stock which customers can earn cash back on. Gift cards for different merchants earn varying amounts of cash back depending on how much you spend. If you are interested in maximizing your savings while you shop, try to find gift cards for retailers who offer the highest percentage of cash back.  


It must come as no surprise to you to learn that open-loop gift cards operate in contrast to closed-loop gift cards. Where the funds on closed-loop gift cards may only be utilized at designated merchants, open-loop gift cards are a lot more fluid in their spending capabilities. These types of gift cards are perfectly suited for folks who like to shop at a variety of retailers for any products and services that catch their eye. Since open-loop gift cards are not locked to specific merchants, users of these gift cards can use the funds at any business that chooses to accept them as payment. 

Two popular examples of open-loop gift cards that you’ll often find in stores are Visa gift cards and Mastercard gift cards. Both of these gift card options are currently available for purchase at Gift Card Granny. Simply choose between Visa or Mastercard, designate a value for your gift card, and pay the corresponding activation fee before sending your gift card straight to your recipient. 

Open-loop gift cards generally cost buyers a little more than closed-loop gift cards due to the fees associated with the gift cards. Though typically only a few dollars, these fees can be viewed as a downside for many and may make open-loop gift cards less appealing than their fee-free counterpart. 

Buy a Mastercard gift card from Gift Card Granny

Buy a Visa gift card from Gift Card Granny

How Do Businesses Make Money On Gift Cards? 

Since gift cards only possess the monetary value that you impose onto them, how gift cards necessarily work to make businesses money can be a little confusing. We’ve gone ahead and broke down the main ways that gift cards benefit businesses that choose to sell them. Three of the most important ways businesses earn a return through gift cards are listed below.

Unspent Balances & Fees

Only open-loop gift cards that can be spent at a variety of businesses require customers to pay a fee to cover the cost of production and processing fees. Closed-loop retail gift cards can be sold at face value and cost the customer no additional fees. Since there are no fees being charged to the customer, the card’s production cost is covered by way of other products and merchandise purchased. 

If a gift card’s balance remains unused or only partially used a few years after it is purchased, the issuing merchant may receive a small return by way of a small fee implemented on the gift card due to inactivity. Depending on the length of time that goes by and the remaining balance on the gift card, the entirety of the gift card value may be reduced to zero. 

Referred Customers

A gift card provides a great form of advertisement for businesses that buyers may be interested in. If a customer is buying a gift card for a specific business they will likely feel positively about some aspect of the retailer, whether it be a product or service they happen to offer that is attractive to potential customers. A gift card gives a buyer the incentive to visit the business and check out what types of merchandise, services, and additional experiences are currently being sold. If they don’t like or aren’t interested in what the business has to offer, then the customer will have lost nothing and the business only loses the cost of the card’s production. When it comes down to it, gift cards provide a very low cost, low risk way for businesses to advertise their services and extend their outreach within communities. 

Customers Who Overspend the Balance 

Gift cards give people an excuse to spend money at a store when they otherwise may not have. Since gift cards are issued in specific amounts like $15, $25, $50, or $100, people are encouraged to shop to that denomination or above in order to fully make use of the gift card’s funds. It’s near impossible to match the amount you spend exactly with your gift card value, meaning it’s often the case that customers spend more when shopping with a gift card. Customers will usually add something small to their initial purchase if their total is below the value of the gift card. The additional marginal revenue businesses earn from these customers is around 20%. 

Purchasing your favorite products and services from the retailers you love should never be a hassle. Use gift cards to simplify your shopping experience and never spend another second stressing. 



You never have to fret when it comes to shopping with your gift card when you stay informed with Gift Card Granny. We provide the gift card advice you need to make navigating shopping with your gift card a simple and rewarding endeavor. Whether it’s for a single store or any business on the block, you’ll become a pro gift card user before you know it!