With every consumer reward or incentive program, it’s usually just a matter of time before someone figures out how to exploit it. Credit card-based rewards systems are no exception. But there are some savvy spenders out there who manage to push these incentives to the limit and even turn a profit in some cases. These users learned to “game the system” and take churning to the next level by rapidly gaining travel rewards outside of the standard introductory bonus. Enter the careful art of manufactured spending and the focus of this guide.
What is Manufactured Spending?
Manufactured spending is the process of purchasing items with a credit card with the primary purpose of earning cash back or other rewards. This is done either through the credit card issuer or a specific merchant. In some cases, the bonus earned exceeds the value of the initial expenditure. At this point, manufactured spending has occurred. This is one of the primary earning methods for credit card churning.
The concept of manufactured spending is a bit obscure and can be confusing for some. However, knowing how to properly, legally, and effectively utilize manufactured spending in your churning processes can compound the potential rewards at your disposal.
Manufactured Spending: A Brief Example
For example, a credit card may offer a $200 bonus to new cardholders who spend $1,000 with the card in the month after they open the account. Let’s say you’ve spent $800 on various items, but still need to make up the $200 difference.
You could purchase a $200 Visa gift card or $200 money order to reach the $1,000 threshold, and then use the gift card or money order to pay either the credit card bill or another bill. The $200 bonus then becomes pure profit. While that is one of the simplest of examples, it’s the basis of how manufactured spending can be beneficial for credit card churning and increases in credit card rewards.
When done judiciously, manufactured spending can be a lucrative way to maximize the benefits available through consumer rewards programs. However, if you don’t carefully plan and track your purchases, you may end up spending beyond your means. In doing this, you could be incurring unmanageable debt, and ultimately damaging your credit rating.
Note: For more information about how to improve your credit score if it is low or has been damaged, please see our resource on how to improve your credit score.
To learn more about the potential payoffs and pitfalls of manufactured spending, read on.
Who Should Try Manufactured Spending?
Manufactured spending may be a good option for consumers with reasonably good credit who are eligible to participate in credit card rewards programs. It is also a solid option for those who have the cash funds available to cover most or all of their credit card spending from month to month.
Remember, if you rack up huge balances that take months or years to pay off, the interest you’ll accrue is likely to far exceed any benefit you realize from the rewards program.
If you travel frequently—or would like to—manufactured spending can also help cover some or all of your flight and lodging costs. This is done through credit cards linked to airline and hotel rewards programs, such as Hilton or Delta.
Many cards and programs offer sign-up bonuses and other incentives that add up quickly. This is especially true when you open several accounts at the same time and meet any minimum spending requirements. Skilled consumers have been known to fly around the world for free by taking advantage of manufactured spending strategies.
Is Manufactured Spending Legal?
As long as you abide by the terms and conditions of each individual incentive program, manufactured spending is legal. In some ways, it’s similar to extreme couponing. These shoppers collect hundreds of coupons and take advantage of specific retailers’ sales and promotions. This often ends up with the consumer reaping thousands of dollars worth of merchandise while spending $100 or even less.
However, most people don’t have the time or energy to clip coupons and scour the sales flyers. For many, it is not a valuable use of time. Trust me, I’m all about focusing on using time effectively.
Likewise, manufactured spending takes more time and effort than most people are willing to invest. So, for the most part, companies only take steps to discourage the practice when they start seeing losses from the widespread exploitation of rewards programs.
That said, there are some activities that could raise red flags with local authorities or credit card companies. One of these such red flags is purchasing hundreds of gift cards to immediately turn around and sell them all. This could appear to be part of a money laundering scheme.
Keep in mind that if you complete a cash transaction that exceeds $10,000 in value, you are required to submit a currency transaction report to the U.S. Treasury Department.
What are the Best Methods of Manufactured Spending?
Manufactured spending strategies evolve frequently as merchants adjust the terms of rewards programs in an effort to curtail the activity. However, the following tips can help you take advantage of bonuses and incentives with minimal risk.
Purchase money orders with your credit card
If your local retailer permits it, use your rewards-based credit card to buy a money order and then deposit the money order into your bank account. Put the funds toward your credit card bill.
Note that many large retail chains no longer allow money order purchases with credit cards due to the high fraud potential. However, some smaller, independently owned stores still permit it.
Before attempting this strategy, check to make sure your credit card company doesn’t label money order purchases as cash advances. This type of spending can incur significant fees. I know for a fact that the American Express Platinum Card considers money orders a cash advance.
Open a bank account
Some banks will allow new account holders to make their initial deposit using a credit card. In many cases, you may qualify for a cash reward from the bank for opening a new account. This is in addition to the points or other rewards you’ll earn from your credit card.
Again, confirm that your credit card company won’t consider the expenditure a cash advance before proceeding. And again, I know for a fact that the American Express Platinum Card considers this a cash advance as well. Tread with caution.
Send money to a friend through a payment app
If you need help reaching a minimum spending target, ask a friend to help you with payment-app cycling. You’ll use your credit card to send the friend money through PayPal, Venmo, or another payment app. Then, have your friend send the same amount back to you. Most credit cards classify payment app transactions as purchases and not cash advances.
However, one thing to note is that, with larger transactions across some of these platforms, you may be charged a fee. For example, submitting Venmo payments with a credit card incurs a 3% fee. Depending on the size of the transaction, this may be detrimental to credit card churning.
Buy and resell merchandise
If you can find a good deal on a popular item or commodity, you can purchase it and then resell it on eBay, Facebook marketplace, or a local sellers’ group.
Buying through airline shopping portals like Southwest’s Rapid Rewards Shopping and United’s MileagePlus Shopping can earn you airline points in addition to those you score from your credit card. You might even be able to make a profit on the item for resale as well.
Buy retail gift cards
If you need a boost to reach your minimum spending limit on your credit card, consider purchasing gift cards at a retailer that can earn you bonus points or cash back through your card.
For example, if your credit card has a 5% cash back promotion at Lowe’s, but you don’t need any home improvement items, go to the store’s gift card rack and stock up on gift cards. Obtain them for retailers you’d patronize anyway, such as gas stations or restaurants.
You’ll not only meet your minimum spending amount, but you’ll also nab that extra cash back. You can also resell gift cards near face value through online marketplaces like eBay, Gift Card Granny, and GiftDeals.
Help a friend make a major purchase
If you know a friend is planning to pay cash for a significant expenditure, such as furniture or electronics, offer to pay with your rewards card. Thank him or her with a cup of coffee or another small token of your appreciation.
One way that my wife and I rack up a high number of reward points is by gifting them to family members. This goes double when we take vacations with family members. We pay for their flights and hotels with our associated and relevant cards. In return, we get a solid number of points. And, they get to experience the high-value rewards that specific levels of service offer.
Most Effective Credit Cards for Churning in 2023
What are the Risks of Manufactured Spending?
Before you attempt manufactured spending, it’s important to be aware of the potential risks involved with the practice. Consider these risks and weigh them against the potential benefits and rewards you might earn in return.
Appearance of Fraud
As mentioned earlier, banks are required to file a report with the IRS when cash or money order transactions exceed $10,000. If you make multiple small deposits that total more than $10,000, it may look like you’re trying to avoid being subject to these reporting requirements. As a result, the federal government could charge you with structuring. This is a term for organizing your transactions to evade reporting rules.
In some cases, banks may close your account if they observe what they consider to be an excessive number of money order deposits. The threshold varies from institution to institution. But, it’s a good idea to have a separate account for your manufactured spending transactions.
Make sure that this account isn’t tied to your personal spending or bill payments. That way, you won’t experience too much inconvenience if the bank shuts down the account.
Opening Too Many Accounts
It can be tempting to open multiple new credit cards or bank accounts to take advantage of lucrative incentives. But, remember that new accounts and hard inquiries on your credit can take their toll on your credit score. To counteract and balance, prioritize the offers with the best return.
Credit Utilization
You may make lots of purchases as part of manufactured spending. If you don’t pay off your credit card every month, your credit utilization percentage goes up. This can cause your credit rating to drop. It takes time and effort to restore that damage.
Keep your credit card utilization at 30& or less of your available limit to protect your score. This is especially important if you plan to take out a mortgage, auto loan, or major personal loan in the near future.
Note: More about credit utilization and churning risks are covered in Potential Credit Card Churning Risks For 2023 and Beyond.
Closed Credit Accounts
If your credit card company flags you for unusual activity or identifies your involvement in manufactured spending, it may opt to close your account. Although manufactured spending is technically legal, it costs the credit card company money. The company may determine you’re more of a liability than an asset.
Closed credit accounts can negatively impact your credit rating. So, this is a risk you should be aware of before you start manufactured spending.
Credit History
Closed accounts can also impact the length of your credit history, another important factor in determining your credit score, so be cautious in using cards you’ve held for a long time as part of your manufactured spending efforts.
Is Manufactured Spending Right for Me?
Before you start manufactured spending, you have to weigh the potential benefits against the financial and moral risks.
For some consumers, manufactured spending feels like too much of an ethical gray area to pursue. After all, it requires you to exploit consumer rewards programs beyond what they were intended to achieve. This is still true even if you’re technically abiding by the terms and conditions.
For others, just knowing they’re following the letter of the law is sufficient to quiet their consciences regarding manufactured spending.
The main risk of manufactured spending is a depleted credit score due to overspending or closed accounts. To be truly successful at manufactured spending, you need to carefully track your rewards and plan your purchases and payments to maximize your return.
If you don’t have the time or personality type to keep meticulous records and schedules, manufactured spending probably isn’t the best choice for your financial health.
But What About Issuers and Retailers?
As far as credit card issuers and retailers are concerned, the main goal is to keep you around as a spending customer beyond the limits of the introductory period or rewards program. As more people begin to take advantage of incentives, the company is likely to change the structure or rules of the program to make sure they’re not losing money on the deal. So, you have to stay on top of any changes or restrictions related to your rewards program.
Like most profit-making ventures, manufactured spending involves some level of risk. If you have the time, funds, and energy to devote to it, manufactured spending can be an easy way to earn a little extra money or even fund your dream vacation.