Manufactured spending

  Credit Card Reference

One of the basic tenets of reward travel is to use your credit card to earn points for everything you buy. The first step is to make sure you are using a good rewards card. The second step is to try to use your card whenever you can, rather than paying with cash or a check. The third step is to figure out what ongoing bills, such as your cable bill, you can pay with your credit card.

But, we want to earn as many points as possible. One we’ve shifted as much of our expenses to our credit cards as we can, how can we increase the amount of our charges, without spending any more money than we would have otherwise?

Many reward experts take advantage of “manufactured spending”. This is essentially making purchases with your credit cards, where you aren't really spending any of your money (minus some fees).

For example, if you use your credit card to “fund” a newly opened bank account, you wind up with a credit card charge, but you didn’t really spend any of your money. You can easily get the money back from the bank account later.

Uses of “Manufactured Spending”

There are several different ways you can benefit from manufactured spending (artificially increasing the volume of purchases on your credit card).

• Qualify for additional signup bonuses. Manufactured spending can allow you to meet the sign-up requirements of more cards each year, and collect more signup bonuses than would be possible with your natural spending. This is the most valuable use of manufactured spending.  
• Earn additional points. Manufactured spending can also let you earn more reward points from your existing cards, than you would earn just through your natural spending. For example, let’s say that you would naturally spend $10,000 per year on your Chase Freedom Unlimited card, resulting in 15,000 Ultimate Rewards points. But, if you could use manufactured spending to generate an additional $40,000 in purchases per year, you would earn 75,000 points instead.

This type of manufactured spending is most valuable if you can earn high reward rates on the spending. So, a lot of activity in this space involves taking advantage of 5%+ bonus category reward earning rates on a variety of different credit cards.

• Qualify for additional credit card benefits. Many popular credit cards provide special benefits if you spend a minimum amount of money each year on the card—you can earn free night certificates, a higher-level of hotel elite status, or qualifying miles to help you qualify for frequent flyer elite status. Often, you need to spend significant amounts of money to qualify for these extra benefits. For example, maximizing the number of qualifying miles for Delta elite status requires spending $60,000 each year on the Delta Reserve card. Manufactured spending can allow you to more easily meet these substantial spending requirements, and qualify for the extra benefits.

The value of any extra spending can differ widely between these different uses of manufactured spending. For example, if generating an extra $3,000 in credit card charges can help you earn a signup bonus worth $600, each dollar of manufactured spending is getting you 20 cents in value. If you can generate 5x Ultimate Rewards points per dollar at an Office Supply store, each dollar of manufactured spending can earn 8.5 cents in value. If instead, you are just using a 2% cash-back card on non-bonused spending, each dollar of manufactured spending earns just 2 cents in value.

Types of “Manufactured Spending”

There are many ways to generate additional spending on your credit cards. Each has different downsides in terms of time, fees, and other hassles; and different upsides in the amount of points that you can earn.

• Use bill pay services to pay off bills that you can’t normally pay by credit card. This is the most straightforward type of “manufactured spending” (and often not considered “manufactured spending” at all).  Many of your largest bills and expenses, such as rent or mortgage payments, insurance bills, student loan payments, car payments, and taxes, can’t normally be paid by credit card. As a result, most people can only earn reward points on far less than half the money they spend each year. However, by taking advantage of several 3^rd party services, you can use your credit card to pay almost anyone. You just need to pay 2 – 3% extra (in credit card fees). Pay Any Bill with a Credit Card (To Increase Your Credit Card Spending).

• Fund new bank accounts with a credit card. Some banks allow new accounts to be funded by credit card. And some credit cards won’t treat that as a cash advance. The best part about this strategy is that there are no extra fees involved—it is “free” way to generate extra spending on your credit cards. However, there are limitations and risks involved. Earn Points by Funding Bank Accounts with Your Credit Card.
• Purchase money orders. Probably the most common manufactured spending technique involves purchasing money orders. You can’t purchase money orders directly with a credit card, however you often can with a debit card. So, to implement the strategy, you use a credit card to purchase Visa gift cards, ideally at a store where you earn bonus points. Then, you use those gift cards to purchase a money order. Then you deposit the money order in a bank account, or use the money order to directly pay a bill. There are some fees, limitations and risks involved. Manufactured Spending by Buying Money Orders.

• Buy and resell gift cards. The other common manufactured spending approach is buying and reselling gift cards. The idea is to purchase gift cards for different merchants at a discount and/or earn additional rewards through promotions and shopping portals. Then, you sell the gift cards to someone else, either at a small profit, or at a small loss.  Frequent Miler and Points with a Crew have good introductions.

• Buy and liquidate PIN-enabled debit cards. The “classic” manufactured spending technique involves buying Visa or American Express gift cards, then using the gift cards to “load” special financial accounts, which are primarily designed for people without regular bank accounts. Then, you use the money in the funded account to pay bills, such as your credit card bills.  Frequent Miler has a good introduction on Prepaid cards that allow debit reloads. However, this technique is generally not available, at any worthwhile volume, any more.
• Buy and re-sell physical products. This works like gift card reselling, except that you do it with physical products, like iPads. Just as with gift cards, you try to take advantage of discounts, promotions, and cash-back portals, to purchase items at a lower-than-normal cost. Then you sell them to someone else at a profit, or a small loss. Of course, this starts blending into being a real retail business.

A variant on product re-selling is to take advantage of "Buying Groups". Many promotional deals are limited to one purchase per customer. A Buying Group solicits individuals to each purchase an item, shipping it directly to the organizer, or reshipping it once it arrives. The organizer then pays the buyer a set amount of money. This removes the hassle of selling the item through eBay or some other means and guarantees the profit margin. Through this mechanism the Buying Group organizer has a way to take advantage of these deals in bulk.

• Fund Kiva Loans. Kiva is a micro-lending marketplace, where you can make small loans to people and businesses who need to borrow money. You can fund your Kiva account with a credit card, make a loan, and eventually get paid back in “cash”. If you can identify low-risk loans, you can manufacture a bunch of spending, while simultaneously helping a small business. Three good articles to get you started are available from Frequent Miler, Doctor of Credit, and The Miles Professor.

• Fund betting accounts. Some gambling-related websites let you fund your account with a credit card. Later, you can cash-out your account by check. While the account is loaded, you can usually generate some gambling activity with strategies that will typically only result in small losses. Travel Codex was where we learned about the ability to do this with Fantasy Sports Leagues.
• Shuffle money between people. You can send money to a friend, and then have the friend give you your money back. You’ll pay fees to do this with your credit card. This works in small doses, but if you try to scale it up, your accounts will get shut down.
• Charge yourself, with your own credit card scanner. If you have a small business, you might be able to take credit cards for purchases. You could use your credit card machine to charge your own credit card, and just pay the normal credit card processing fees. But, this is against your terms of service, so it will get your account shut down, if it is discovered.

Some warnings about manufactured spending

There are some serious potential pitfalls with manufactured spending. Depending on the strategies you follow, you can be hit with unexpected fees, stuck with gift cards that are difficult to unload, or even run afoul of federal money laundering laws.

• Start out slow. Things may not go as smoothly as you planned. Make sure to start out slow, so that you can get the hang of things, and work the kinks out.
• Avoid credit card cash-advance fees. Manufactured Spending techniques can involve transactions that a credit card company might consider a cash advance, rather than a traditional credit card charge. If they do, you’ll be charged a significant fee (typically 5%), and you’ll have to pay ridiculously-high interest rates from the date you made the charge, until the date you pay your credit card bill. In addition, cash advances generally don’t earn points, and don’t count against the initial spending requirements. So, you’ll wind up paying the hefty fees, and won’t even get the benefits you were aiming for.
• Your first line of defense is to lower your credit card’s “cash advance limit”. With some credit cards, you can lower this to zero, and with some other credit cards, you can lower it to $100-200. This way, if the charge is going to be coded as a “cash advance”, it would simply be denied. This should protect you from having a transaction show up as an unexpected cash advance. However, there is still some possibility of the charge being considered a cash advance as part of a later investigation.

Since this isn’t the most common request, it might take some time with a customer service representative to accomplish this task. If at first you don’t succeed, hang-up, and call again. For more details, see Doctor of Credit’s guide to lowering your cash advance limit. 

• You can check the web, to see how transactions have been handled in the past. Theoretically, it is up to the party you are paying to determine whether a payment is a cash-advance or not. In practice, the answer can be different on a credit card by credit card basis. While we recommend always setting your cash advance limit to zero, we also recommend checking to see how the transaction is likely to be handled, by searching the web ahead-of-time. This saves you from wasting your time trying to complete a transaction that is going to be denied, and virtually eliminates the chance that you might get charged for a cash advance, even though you’ve lowered your limit.
• Another technique is to try out a small purchase, if possible, and see whether you are charged or not.
• Your accounts can be shut-down. The crazier your manufactured spending approaches are, the more likely it is that your credit card company, or one of the other involved companies, will shut you down. Most companies can close your account for any reason—you don’t have to violate any specific published rules. So, if the credit card company, bank, financial institution, or even a store is unhappy with you, they may ask you to take your business elsewhere.

In extreme cases, your current balances may be “frozen”, while they investigate your activity. In even more extreme cases, they may close the accounts of relatives and/or people who live at the same address.

Many people try to avoid more dubious manufactured spending activity (e.g. funding a bank account with a credit card, buying super-high volumes of gift cards) with any company that they really want to keep a good relationship with. It is a good idea to avoid using a credit card from one of the major banks.

• Avoid “structuring” transactions to stay out of trouble with the feds. The government likes to know about large cash and cash-like transactions. It helps them identify bad guys. Generally, they want to know about any transactions of over $10,000. If you break up, or otherwise “structure”, your transactions so that you are moving large amounts of cash around, but staying below $10,000 on each of your transactions, you’ll run afoul of laws aimed at thwarting people who are trying to hide their activity; and you can get in serious trouble. You are going to be okay paying your bills, but don’t go out and purchase and deposit multiple sub-$10,000 money orders into your bank account. And don’t do anything else. that is an attempt to hide your financial activities from the government.

These same financial information laws provide an incentive for banks and other financial institutions to avoid customers who might generate additional paper work or hassles for the bank.

• You can pay off your bill mid-statement, to increase your credit limits. If you start to do massive amounts of manufactured spending, you’ll start bumping up against your credit limits. This is especially true if you are concentrating your spending on selected cards that earn bonus rewards. To increase your monthly capacity, you can pay off your credit card bill partway through the month. This allows you to spend amounts that are multiples of your normal monthly limit. Of course, this behavior is noticeable to the bank, and may eventually result in having your card shut down.

Credit Cards 101

Pay Any Bill with a Credit Card (To Increase Your Credit Card Spending)

Manufactured Spending by Buying Money Orders

Send comments or suggestions to editor@travelstrategies.com or leave a comment below.

blog comments powered by Disqus