Check Merchants Financial Pulse Before Buying Gift Cards

Thousands of consumers were left out in the cold in 2008 when a storm of merchant bankruptcies turned roughly $100 million worth of gift cards into little more than tiny windshield scrapers. (See Granny's holiday post on 16 creative uses for useless gift cards.)

Mervyn's, Sharper Image and Linens 'N Things, among many others, reneged on gift card deals, leaving consumers with no recourse but to get in line behind much larger and powerful creditors.

While chains are getting all the attention, gift cards from mom and pop shops and local eateries can be just as iffy, although the creditor line-up may be a bit shorter. So how do you know which gift cards are safe and which should be avoided like Buffalo in January?

First: Avoid small-time merchants or restaurants that have recently opened and show little traffic.

Second: If your gift card has 19 digits and a pin, it may expire in one year or less. Look for cards that are good for the long haul.

Third: Frequent merchants with solid financial records. For example, you can tell Best Buy and iTunes gift cards are fairly safe because Forbes reports both companies are showing higher profits and a steadily improving market value.

Fourth: Keep an eye on the following seven companies that appear on the latest edition of the Forbes Risk List. The financial publication reports theres an average probability of 8 percent that one of these companies will go bust in the next year.

1. Zales
Jewelry retailer
Change in revenues over last 12 months: -13%
Net income over last 12 months: -$155 million

2. Rite Aid
Drugstore chain
Change in revenues over last 12 months: -2%
Net income over last 12 months: -$507 million

3. Trans World Entertainment
Entertainment retailer including f.y.e., Wherehouse Music and Coconuts Music & Movies
Change in revenues over last 12 months: -18%
Net income over last 12 months: -$40 million

4. Borders Group
Bookstore chain
Change in revenues over last 12 months: -15%
Net income over last 12 months: -$88 million

5. The Bon Ton
Department Store Chain
Change in revenues over last 12 months: - 4%
Net income over last 12 months: $18 million

6. Perfumania
Fragrance retailer
Change in revenues over last 12 months: 19%
Net income over last 12 months: -$16 million

7. Grand Atlantic & Pacific Tea Co.
Grocery store chain, including A&P, Pathmark, Waldbaums, Super Fresh, The Food Emporium, and more.
Change in revenues over last 12 months: -7%
Net income over last 12 months: -$877 million

The Forbes Risk List focuses on non-financial companies with public market values of at least $50 million and with $150 million or more in assets.