Homebuyers are increasingly using gift cards as a substitute for credit cards or cash, including when saving for a down payment.

NEW YORK – In an era defined by skyrocketing housing prices and innovative financial strategies, a surprising trend is emerging: the use of gift cards as a means to navigate the landscape of homeownership.

Traditionally reserved for birthdays and holidays, gift cards are now finding a new role as unconventional tools to help save for down payments. They’re also a creative alternative to traditional banking methods for managing one’s finances. These unconventional approaches reflect the ingenuity and adaptability of consumers in the face of economic challenges, offering a glimpse into the shifting paradigms of personal finance in the modern age.

Using gift cards to manage finances

There are two ways people use gift cards for budgeting. A small but growing number of people use them in place of a cash envelope budgeting system. This popular technique allows users to assign cash to each spending category and store the money in an envelope. Popular envelope categories include groceries, utilities, and entertainment.

When consumers empty envelopes, spending in that category ceases for the remainder of the month. To continue spending, they must transfer money from another envelope to cover future expenses.

However, the traditional cash envelope isn’t as effective when more consumers rely on credit as a payment method. However, by purchasing reloadable gift cards, users can assign a card for each category and ensure they do not exceed their budget.

With this method, consumers can purchase Apple gift cards to cover digital content costs, and once they run out of funds, they stop spending. The most popular areas for this type of budgeting are for digital content purchases (83%), grocery stores (47%), gaming (41%), and online retailers (23%). For many, it’s a simple way to ensure they spend wisely.

“I grew up using cash envelopes for budgeting, but with online shopping and bill pay, using a cash-only budget was too complicated. By using gift cards, I can still use the budget system even though I do most of my shopping and bill paying online,” says Pam, a mother of two in Pennsylvania.

A growing number of people are taking gift cards one step further and using them as a banking alternative, with a 25% year-over-year increase. Some consumers use reloadable and virtual gift cards instead of traditional checking accounts to shop and pay bills.

The growing popularity of gift cards and cash as gifts

There is still a robust market for gift cards and cash as gifts. The global gift card market’s value was an estimated $835 billion in 2022, and predictions expect it to grow to $4.2 trillion by 2032. Part of this growth stems from the increasing popularity of requests from newlyweds and first-time homebuyers.

Forty-three percent of first-time home buyers report cash gifts as a source for their down payment, and 85% of newlyweds list a home fund on their wedding registry. The median home price is $417,700, so a 20% down payment equals $83,540. Putting down as little as 5% means having $20,885 in cash.

With a personal savings rate of only 3.7%, saving either amount for a down payment would take many years. A unique way to increase savings and reach this goal faster, is to ask for money for a down payment, or gift cards to offset spending in other areas.

Unique ways people are getting gift cards

While the traditional route for purchasing gift cards is to visit a store or buy directly from an online retailer, people are getting creative to save money. For many, purchasing a gift card at a grocery store and paying with a cash-back credit card is a popular option. If a credit card offers 2% cash back on grocery store purchases, and a person buys $100 of gift cards, they earn $2 cash back, effectively making the purchase $98.

Some consumers wait for discounts, buying gift cards from warehouse clubs at a 5% savings or more. Others anticipate holiday discounts.

Still, others get even more creative. Many people are turning to apps that pay money and opt for gift cards as a reward instead of cash. For example, many apps allow users to play games, watch videos, or complete surveys for points. They can redeem these points for gift cards to their favorite retailers. This route allows them to get a gift card without paying anything but their time.

Some websites sell unused and partially used gift cards for a discount. CardCash.com is a popular option, with some cards selling for up to 25% off face value. If a person goes this route, purchasing the card from a trusted source that verifies there is money on the card is essential. There is no verification when buying gift cards on Craigslist or Facebook Marketplace, and scams are widespread.

Should you give cash or gift cards?

Cash or gift cards are appropriate as wedding gifts or to help fund a house down payment. Etiquette expert Diane Gottsman states, “Both cash and checks will be greatly appreciated, and it becomes subjective, depending on the bride and groom. Some people prefer cash, while others can keep better records of checks when writing thank you notes [for cash gifts].”

When gifting gift cards, ensure recipients prefer open-loop cards, like Visa, or closed-loop cards specific to particular retailers.

Reasons to be cautious with gift cards

For people who decide that gift cards are a smart way to manage their finances or as a gift to help loved ones purchase a home, it is critical to understand the downsides of gift cards. The most significant issue that plagues gift cards is fraud, which can take many forms.

The most prevalent is when a scammer copies the 16-digit code and the PIN of a gift card and replaces the scratch-off area covering the PIN, making it look new. When a person activates the card by purchasing it, the scammer immediately spends the balance, leaving the actual owner with a worthless gift card.

Making matters worse is that gift cards are seen as cash equivalents, so recouping the money is nearly impossible. There are no signs of a slow-down in gift card fraud either. In 2023, it grew by 50% compared to 2022. It is critical, therefore, to inspect a gift card before purchasing. If there are any signs of tampering, the potential buyer should notify store management immediately and not buy it.

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Author: amyc