Editorial Policy

Want To Use A Gift Card At a Restaurant? Beware the ‘Tip Tolerance’ Effect

Kristin McGrath

December 7, 2012

Preloaded gift cards are advertised as being the perfect gift, combining the convenience of plastic with the flexibility of cash. But, if you try to use your gift card at a restaurant, you might run into some snags.

Here’s what happened to me last weekend:

A $50 Wells Fargo-issued Visa gift card I’d won in a raffle had just arrived in the mail. The timing was perfect because my city’s Christmas tree lighting — which my boyfriend and I have a tradition of attending — was on Saturday. We always cap off the night by eating dinner downtown at a fancy (for us, anyway) restaurant. That $50 wouldn’t quite cover the whole bill, but it would make a pretty good dent and help us justify additional wine purchases.

At the end of the meal, I handed the waitress the gift card with instructions to put $50 on it and then put the remaining balance on my debit card.

“Um, this got declined,” she said when she returned to our table with the gift card a few minutes later. I told her I’d just checked the balance, and that it was indeed $50.

“Well, sometimes gift cards get declined if you try to use up all the money on them,” she explained. “I think it’s an anti-fraud thing so that a thief can’t use it all? Anyway, I’ll try putting $40 on it and see if that works.”

That explanation didn’t make much sense to me, but the transaction went through smoothly at $40, and an extra $10 ended up on the debit card. We left a cash tip.

The next day I got to thinking about that $10 I assumed was still on the gift card. What better use for it than breakfast tacos? I headed to a neighborhood joint. My total was $6. I handed the cashier my card.

“Um, no, this got declined,” she responded, handing it back to me.

At home, I checked my gift card balance online. The restaurant had charged me $48 (not $40) the previous night, leaving only $2 (not $10) on my card.

So, what gives?

I called Wells Fargo customer service. A concept called “tip tolerance” was apparently at work here. An extra 20 percent, to account for a tip, had been added to my restaurant bill. This is an automatic feature built into the card, I was told, and, because I’d left my tip in cash, I would get that money back on the card when my transaction cleared, the rep assured me.

To get a more complete picture of tip tolerance, I reached out to a Visa spokesperson who explained that gift cards are treated differently at restaurants than debit and credit cards are. While a credit card has a credit line behind it, and a debit card has the customer’s bank account behind it, gift cards just have the funds loaded onto them. When those are exhausted, the card is worthless.

That’s why the banks that issue the gift cards build in a 20 percent tip tolerance that gets withheld whenever a card is used at a restaurant or another establishment where tipping is customary, compelling the merchant to run each transaction for 20 percent above the original value to account for a tip. This prevents someone from maxing out the gift card on a meal, leaving a generous tip on the receipt and leaving the server in a lurch when it turns out there aren’t enough funds on the card to cover that tip.

You don’t have to leave a tip on the gift card. And, if you don’t, that extra 20 percent will get refunded to you when the transaction clears, usually two to three business days later. That’s why I couldn’t use my card for breakfast tacos.

I’m thankful for the generosity of the organization that gave me $50 — yet this tip tolerance business made my gift card a slightly embarrassing hassle. Imagine if I’d been taking someone out for a business lunch? However, the hassle was partly of my own making, as Visa, American Express and banks that issue gift cards all warn customers about tip tolerance on their websites.

There’s nothing you can do to avoid getting charged an extra 20 percent — and tip tolerance exists for a good reason. The key to avoiding embarrassment is knowledge. Know that using your gift card is not just like using cash. Before heading to the restaurant, check the balance (you can easily do so on the issuer’s website or via the phone number on the back of your card). When the check arrives, crunch some numbers and make sure your card has enough to cover the bill plus an additional 20 percent. When that 20 percent gets refunded to you, you can always use it on smaller purchases later on.

With doing your financial homework in mind, here are some of the best personal finance blog posts of the week:

Money Beagle warns readers about manufacturer’s sneaky price hikes by cleverly repackaging products with, well, less product in them.

One Money Design suggests some gifts for the more financially minded people on your Christmas list.

Modest Money explains how you may be wasting money on groceries every week.

Money Thinking provides four smart ways to give to charity.

Vanessa’s Money shares the secret to traveling on the cheap — research.

Reach Financial Independence explains how to negotiate your debt and bills.