Some people claim that with careful use and good strategy, an average
consumer can earn a consistent profit by using credit cards for their reward
programs.
What is manufactured spending?
Manufactured spending is a term that refers to the practice of using credit
cards without actually incurring new charges. For example, using a credit
card to buy a reload card, using the reload card to add funds to a prepaid
debit card, and then using the prepaid debit card to pay off the original
credit card charge. Another method is to simply use a credit card to
purchase a gift card and then use the gift card as you would use cash. The
advantage is that the consumer earns reward points on the original credit
card purchase, even though he or she essentially only bought the money with
which to pay the bill.
Manufactured spending strategies are varied and complex. Online forums
discuss in detail when unusual opportunities present themselves. Earlier
this year, one writer described using a credit card to buy low-fee Visa gift
cards from Staples office supply store. The credit card offered 5x points
for all office supply store purchases, and he shopped through a shopping
portal that offered an additional discount. Even after the cost of each gift
card was factored in, he claimed to have made a cash profit on the
transaction.
At any rate, credit card companies are catching on, and opportunities to
truly manufacture spend are rarer every day. Few, if any, retail outlets
accept credit cards for the purchase of reload cards today. Many shopping
portals exclude gift cards from bonus offers.
What is credit card churning?
Credit card churning, a related concept, is the practice of continually
opening new credit card accounts in order to take advantage of signup
bonuses. Once the signup bonus kicks in, usually after meeting a spending
threshold, the card is cancelled and the process starts all over again.
To successfully churn credit cards, a consumer must:
Have excellent credit
Understand how hard inquiries affect the credit score
Be eligible for the signup offer (some offers exclude past customers)
Be able to meet the spending threshold in the allowed time period
Pay off credit card balances each month
Furthermore, the consumer must thoroughly understand the annual fee
structure on the card and the value of the signup bonus in relation to the
cost of the card.
Who does it work for?
Manufactured spending and credit card churning are the hobbies of people who
enjoy the challenge of maximizing reward points for as little cost as
possible. Entire websites are devoted to the topics, usually in the context
of earning points for free travel. The holy grail is luxury travel – free
first class airfare to another continent, free rooms in luxury hotels, and
so on. A more realistic goal is free travel, period. Free economy class
airfare, free standard hotel rooms. Either way, the means to the goal is a
steady supply of points and cash back, achieved largely through manufactured
spend and churning, but also through other points-earning strategies (a
very large topic in itself).
These hobbies work for people who have great credit, no debt and outstanding
organizational skills.
Who doesn’t it work for?
The disorganized. Manufactured spending and churning can be confusing. Fees
eat into profits while debt creeps up. Without excellent accounting skills,
a consumer can lose track of gift or reload cards, or they can be lost or
stolen with no recourse.
Those in debt or at risk. Half of all U.S. households carry revolving debt,
and for those who do, the average balance is nearly $16,000. Indeed, many
consumers simply cannot resist charging up their credit cards. Getting into
overwhelming debt is very, very easy to do. Anyone who does not already pay
off their credit cards every month is not a good candidate for manufactured
spending as a hobby.
Those with average or poor credit. A downside to credit card churning is its
potential effect on the consumer’s credit score. Credit scores are partly
based on the average age of the accounts, so any consumer who plans to close
and open credit cards regularly should also have very aged accounts in
order to maintain a healthy average age. And since closed accounts are
removed from your credit file when allowed (ten years since last reported),
the aged accounts should, ideally, be open, active accounts. A consumer’s
credit score is also partly based on the amount of new credit, so always
having new accounts will generally have a negative effect. And churning
increases the risk of missing a payment and further damaging your credit
score. (New credit cards can lower your revolving utilization ratio but
there are too many variables from one consumer to the next to say whether
this can be considered a credit score boost across the board.) The point:
only consumers with excellent or very good credit scores can withstand the
score fluctuations caused by churning.
