A Primer To Manufactured Spending And Saving Money

Introduction

My latest credit card offered a $400 bonus if I charged $3,000 on it in the first 90 days. The clock started on approval, a week before I had the card, and charges had to post to the account by the deadline (it can take a few days for purchases to post).

Also, returned items could put me below the threshold and void the bonus, so spending a little more than $3,000 made sense.

I figured I had 75 days to charge $3,100 on the card. For a frugal guy like me routine purchases wouldn’t be enough. The only way to get that bonus was to do some manufactured spending.

Manufactured spending is using a credit card to pay for things that aren’t really expenditures. For example, if you buy a $500 Walmart gift card with a credit card you haven’t “spent” anything yet.

You’ll spend the gift card balance on groceries in the weeks to come. Meanwhile the purchase of the gift card might have put you over the threshold to earn a credit card bonus or other reward.

That’s a simple example, and you’ll have to pay close attention when we get to the more complicated examples below. But first, let’s look at…

Why You May Want to Use Manufactured Spending

Using manufactured spending to get a new account bonus is easy to understand and analyse. For example, suppose your new credit card offers a $200 bonus if you spend $1,000 in the first 60 days, and you’re a few hundred dollars short as the deadline approaches.

The solution? Buy a $500 Visa gift card to meet the spending requirement, and you can spend the balance of the gift card on future purchases. The typical fee of $6.95 is easily justified by the $200 bonus, right? That’s manufactured spending.

But credit card rewards come in more forms than just bonuses. You also might get…

  • Cash back
  • Airline miles
  • Hotel nights
  • Points good for various rewards

To maximise your rewards you can get strategic about which card you use. I use my American Express Blue Cash Preferred card for its 6% cashback on groceries and my Hyatt card for its 3 points per dollar spent on any Hyatt property.

Still, your normal spending probably won’t earn you much in the way of rewards. That’s why you may want to try some manufactured spending. When you do this for purposes other than getting a big bonus, the math can get tricky. So let’s dive right in with…

A More Complicated Example of Manufactured Spending

Two of my business credit cards give me 5% back on purchases at office supply stores. Office supply stores have sales and promotion on gift credit cards. In fact, OfficeMax had a promotion last week. Pay close attention…

I was driving across town to go hiking in the nearby mountains, and I stopped at an OfficeMax because they offered a $15 discount if you bought $300 or more in Visa Gift cards. These are the kind that come with a PIN and can be used as credit or debit cards.

The purchase fee is $6.95 for the $100 or the $200 cards, so I bought two $200 cards to maximize my cash back. After the discount the two cards came to $398.90. The limit was one discount per customer.

I stopped at a Walmart and used each debit gift card to buy a money order, one for $199.28 and one for $198.34. After paying the 70-cent fee for each they came to $199.98 and $199.04. In the car I made out the money orders to myself and filled out a deposit slip to deposit them in my Wells Fargo account, which I did a few blocks away.

Why those amounts? Well, buying a money order for $199.30 would result in a total charge of exactly $200, which might make the cashier suspicious. And despite all of this being perfectly legal, you don’t want to arouse suspicion.

At least one man had the police called on him for buying money orders as part of his manufactured spending. Nothing came of it since he hadn’t committed any crime, but who wants the trouble, right?

I’ll throw away the card with 2 cents left on it (I set them aside for a month first to be sure there are no problems). The one with 96 cents left on it exactly covered my soda at the convenience store, so there was no loss there (and yes, that was the plan).

I deposited $397.62, I had my 96-cent soda, and I’ll get $19.94 cash back (5% on the charge of $398.90). Total cash value: $418.52. Subtract from that the original cost of $398.90, and another dollar for gas, and my profit was $18.62.

That’s not a big profit, but after my hike I hit another Office Max store and repeated the process. So I made about $37 for an hour of “work” on a day off.

Important Warnings:

There are a few things to be aware of if you try this…

  1. Be careful if you do this on a larger scale! Banks must create a report for the IRS on cash or money order transactions of $10,000 or more. If it appears you’re avoiding reporting requirements by making small deposits that add up to more than $10,000, the bank may notify the IRS and you could be charged with “structuring.” This is true even if you’re not doing anything else illegal. You can read about how to avoid trouble here, but the basic rule is to never try to evade bank reporting requirements.
  2. There are reports of some banks closing accounts when too many money orders are deposited. If you have several bank accounts you might want to deposit your money orders in the one you wouldn’t mind losing.
  3. Some Walmart stores and post offices don’t accept debit gift cards as payment for money orders. Don’t argue, just try another place. The policy seems to be at each manager’s discretion. Walmart has no rule about this posted, and in my experience if you simply say nothing the cashier won’t care if you’re using a bank debit card or a gift debit card.
  4. Some gift cards do not have a PIN, or make it difficult to get one. The best ones just use the last four digits of the card number as the PIN, but with others you may have to go online to register the card and get a PIN, or call, or both.
  5. Some debit gift cards do not work to buy money orders. I recently bought three $200 Mastercard gift cards and registered them online to get PINs, but they were still rejected by the card swipe machine at Walmart. I had to spend them on necessities over time, which brings us to…

Safer Ways to Do Manufactured Spending

What if you’re worried about your bank account being closed or getting arrested for structuring and spending five years in prison? In that case, here are some safer ways to do manufactured spending…

Buy and Spend Debit and Credit Gift Cards

The safe way to “liquidate” gift cards is to simply spend them. Just be sure to calculate your “profit” carefully.

For example, if you see a promotion for “no fee” $200 American Express gift cards (fairly common), you might think you make a $4 profit buying them with Citi Double Cash card, which pays 2% cash back. But everything you buy with the Amex gift card can be bought with the 2% card anyhow, earning you the same amount, so you aren’t any further ahead.

Now suppose you saw the no-fee deal at an office supply store and you have a card that pays 5% cash back at these stores. You earn $10 per card ($200 x 5%) and use the Amex gift cards to buy groceries or whatever else would not normally qualify for 5% cash back. That makes more sense.

Still, if you normally use a 2% cashback card for most purchases, your profit is only 3% (the difference between the 5% and 2% rates), or $6 per gift card, and that’s before any expenses incurred driving out of your way to get them.

You have to decide what you’re time is worth and crunch the numbers to know when to do this kind of manufactured spending.

Buy Retail Gift Cards

Suppose your Discover card pays 5% cashback at home improvement stores this quarter but you won’t be spending anywhere near the $1,500 limit. Go to the gift card rack in Home depot and buy cards you can use for other regular expenditures.

If you regularly fill up at Shell gas stations, buy some $50 Shell gift cards. I you eat at Subway, buy some of those gift cards. In this way you effectively extend that 5% cashback to many other purchases.

Buy Discounted Gift Cards

Buying discounted gift cards is a great manufactured spending strategy because it runs up the balance on the card and saves you money when you do the actual spending.

For example, let’s say you need 800 more points on your Marriott credit card to get a free room for an upcoming vacation, and you’ll soon be doing some home remodeling. Just buy $800 worth of discounted Home Depot or Lowes gift cards. You’ll get your free room and get 7% off your home improvement purchases (the approximate current discount on these gift cards).

Make a Large Purchase for a Friend

Suppose a friend who always pays cash for everything is planning to buy a $680 desk from an office supply store. If he gives you the cash and you pay for the desk with a 5% cashback card you’ll get $34. Offer to buy him a sandwich if he’ll agree.

Those are a few of the ways you can use manufactured spending to earn bonuses, cash back, points, and more on your credit cards.

If you’ve used manufactured spending tell us about your experiences below, and keep on frugaling!

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