Surprise: Gift cards can put a 20% hold on your money!

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If you’re a longtime follower of Clark Howard, you probably already know the money expert doesn’t like gift cards for a variety of reasons.

Well, here’s one more you can add to the list — there’s a stealth hold of 20% that issuers sometimes slap on gift cards that could cause your card to be declined when you use it at some businesses.

RELATED: New payment service will let you ‘Dine & Dash’ (legally!) at restaurants

What you need to know about ‘tip tolerance’

Prepaid gift cards that are branded by credit card issuers like Visa, MasterCard, Discover and American Express all have a dirty little secret.

Sure, you already know they come with activation fees ranging from $2.95 to $6.95 that you have to pay when you want to buy one for a gift recipient.

But did you know that they also put a 20% hold on the money that’s on the gift card when you use it at salons, restaurants, hotels or for a car rental  — basically any place you would likely leave a tip or incur incidental expenses?

Actually, this is no secret after all. It’s clearly disclosed in the cardholder agreement that comes with the card…but how many people actually read that thing?

gift card terms and conditions

So let’s say you go out to eat with a $100 Visa gift card that somebody gave you in hand. If your bill is above $80 before the tip — you do know that a tip of 20% is quickly becoming the new tipping standard, don’t you? — the charge will be declined.

That’s because the issuer wants to create a little breathing room for that potential gratuity.

It’s a practice that’s called “tip tolerance,” according to

If you choose to tip less than 20%, you still get to keep the remaining money on the card for future use. But the issuer wants to ensure that they’re not responsible for anything more than the original value of the card if you’re a big tipper who likes to leave above 20%.

Incidentally, this is the same thing that happens when you use a debit card at a gas station.

You might only pump $40 of gas, but the gas station may put a hold for $100 or $150 on your checking account to protect themselves. That hold can last for up to four days and could cause your checks to bounce if you don’t have a lot of money in the account.

That’s why if you must pay with debit at a gas station, you should always go inside and prepay for a specific amount of fuel with the cashier.

Clark’s preferred alternative to gift cards

All of this adds up to another reason why Clark hates gift cards, with one exception — if you’re getting more in value than you’re paying for.

That definitely isn’t the case here, considering the steep activation fee you have to pay when you buy a credit card-branded gift card!

So what is Clark’s preferred alternative to gift cards?

Just give cash! Some people think it’s cold and impersonal, but you never have to worry about tip holds, expiration dates or any kinds of junk fees.

If you want to personalize your cash gift with a little cheapo flair, print out Clark’s “no giftcard gift certificate.”

no gift card cash card

RELATED: Warning — 3 big problems with Visa gift cards

Theo Thimou About the author:
Theo has co-written several books with Clark Howard, including the #1 New York Times bestseller "Living Large in Lean Times."
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