Cardholders can earn rewards by charging up to a certain value within a deadline. For instance, they might get $500 cash back if they charge $3,000 in three months upon opening a card.
Aside from special introductory deals, there are several basic incentives such as earning travel miles or cash back for every dollar spent on a daily basis. There are other special offers such as double or triple points on transactions at grocery stores or gas stations.
However, this presents an interesting problem for the average consumer. People can earn some cash back for spending which is a good thing, but the incentive opens the doorway to assuming more debt and rolling over balances. This can cost the consumer dearly.
However, this is where manufactured spending comes into play. It’s a way to game the credit card rewards system to the consumer’s advantage. Some people think it’s clever, while others think it’s a little sketchy.
Compare Rewards Cards
Chase Sapphire Preferred® Card
- Get 60,000 points after spending $4,000 on purchases within the first 3 months of account opening
- Earn 2X points on travel and dining at restaurants worldwide, 1X points on all other purchases
Capital One® Savor® Cash Rewards Credit Card
- Earn 4% cash back on dining and entertainment
- Earn 2% at grocery stores, and 1% on everything else
Capital One® Quicksilver® Cash Rewards Credit Card
- Get unlimited 1.5% cash back on every purchase
- Lengthy intro APR on balance transfers
What Exactly is Manufactured Spending?
Manufactured spending is the process of charging items on credit that are easily converted into cash such as gift cards. Then the person uses the cash to pay the bill. He or she essentially earns the incentives without spending any real money.
For example, let’s say that Bill uses his credit card to buy a $500 gift card. He earns 500 points due to his purchase. He uses the gift card to pay the credit card bill. He goes back to the store and buys another $500 gift card. This time he uses the gift card to buy money orders. He uses the money orders to pay his credit card bill. At the end of the day, he has earned 1,000 points total without spending any actual money.
The Incentive Behind Manufactured Spending
Manufactured spending is all about earning points without having to spend money. The points can be put towards anything. People use manufactured spending to earn enough travel rewards to fly to other countries for free. They also use it to earn cash back to be redeemed for some purchase.
It’s essentially a loophole. This technique allows people to get something for nothing. If done right, they’re net spending is positive. They aren’t spending anything out of pocket, and they get something in return. It does take some work on the cardholder’s behalf, but those who are willing to put in the time can earn serious rewards.
Manufactured spending is completely legal, but there are a couple of things to keep in mind. First, it can put people on the police’s radar because leaves a money laundering footprint. Some people buy hundreds of gift cards and try to liquidate them into money orders at the same time. This looks extremely suspicious, so the police might get involved.
In addition, credit card companies are doing their part to cut down on manufactured spending. It can be presumed that they do not support the practice since it games their rewards systems. On that note, plenty of people could call manufactured spending stealing since a consumer is getting something in return without spending any money in the end.
Chase is a favorite for manufactured spending since the company’s cards have decent incentives and rewards. People tend to open up several Chase credit cards at a time to maximize their points across the board. Chase enacted the 5/24 rule to combat the issue. People cannot open more than five credit card accounts within 24 months. Those who try to open more are immediately rejected.
Some credit card companies have changed what’s considered regular spending. Cash advances used to be a transaction used in manufactured spending, but many credit card companies no longer allow people to earn points from cash advances. That means people have to find other ways to engage in manufactured spending.
Manufactured Spending’s Impact on Credit
Manufactured spending can impact credit in a couple different ways.
First, people who fail to pay their credit card balances off once the purchase is liquidated end up with high credit card balances. Cardholders should keep their credit utilization at 30 percent or below. Failure to do so could cause credit scores to dip.
On top of that, a high credit card balance increases the chances of missing a payment which would negatively impact credit score.
Another big issue is that some companies shut down accounts due to manufactured spending. The company might suspect money laundering or simply wants to stop the manufactured spending in its tracks.
Additionally, length of credit history has an influence on credit score, so cardholders need to be mindful of their spending habits. If they move too quickly with manufactured spending, they are more likely to be shut down. That will leave negative impacts on their credit reports, especially if their oldest accounts get shut down.
Is It Worth It?
While manufactured spending is legal, people need to consider the morality of such a practice. If companies are trying to end the practice because it is seen as a wrongful loophole to a rewards program, then it might not be such a good idea to engage in it. Consumers can get some free points, but they stand to lose quite a bit if their credit cards are closed out unexpectedly or if their credit declines from malpractice.
Author: Jeff Gitlen
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