The incredible shrinking gift card: fees eat up the value--at consumer's expense.

You're standing patiently in line at Hollywood Video, new release in hand, envisioning a cozy night at home. You head to the counter, blandishing the gift card Aunt Hazel gave you three years ago. But when you swipe the card, you discover it's only worth $3. What gives? Welcome to the world of gift card fees.

"[Gift cards] should come with a warning attached," says Sen. Charles Schumer, D-N.Y. According to a survey released by his office in 2003, some merchants deduct up to $2.50 a month if a card remains dormant for too long or if the full value of the card isn't used within a set amount of time. These fees can add up to 67% of the card's original value.

Some states, like Massachusetts and California, recently passed legislation banning these fees. Sen. Schumer is considering proposing similar federal legislation. In response, some retailers have already changed their policies. In December, Starbucks and Circuit City decided to stop charging fees on their gift cards. "We consider it a positive step for our customers," says Steve Mullen, a representative for Circuit City. "California is our biggest state and fees would have created confusion for customers who bought, a gift card in California but live in, say, Nevada."

Some in the retail industry think education, not legislation, is the key. Mallory Duncan, a senior vice president at the National Retail Federation, notes that most retail gift cards state the expiration date and associated fees. And there are many cards available that don't carry a fee. Gift cards for department and clothing stores like Macy's tend to be free. Chili's and Walgreens, on the other hand, charge $2 a month if the card is not used for 12 consecutive months.

Until gift card fees become a thing of the past, make it a point to read the fine print. That way, you can make a smart choice before you buy.