Rewards cards are a great way to earn free cash and travel, provided you don't carry a balance or pay a big annual fee. But it can take a while to see a significant return: If your card earns a standard 1 percent cash back, spending $10,000 on the card gets you just $100. And the last thing you want to do is spend more money than you normally would just to get points.
So Brad Wilson, founder of deal site BradsDeals, hit on a solution: Why not just use his rewards cards to buy money?
As he explains in his book "Do More, Spend Less," the scheme was made possible by the U.S. government. The Presidential $1 Coin Act of 2005 sought to put dollar coins into circulation by allowing citizens to buy the coins directly from the Mint's website at face value. Shipping was free, and the website accepted credit cards.
So Wilson pulled out his rewards card and bought nearly $3 million in coins.
Not all at once, of course. But over the course of eight months, he would have thousands of dollars in coins delivered at a time, then walk them into the bank and deposit them into his account. Then he would use the money to pay off his credit card bill in full. He was essentially moving money in a circle: putting thousands of dollars in charges at a time on his card, then using the cash he "bought" to pay the bill.
The card he used was the American Express Starwood card, which offers 1 point for every dollar spent. He could then transfer them into an airline's frequent flyer program at a ratio of 1.25 miles per point. That meant for every 800,000 points he put into his American Airlines AAdvantage account he scored 1 million miles, good for 40 domestic round-trip flights. Combined with the miles he'd already earned, he wound up with more than 4 million miles, earning lifetime Platinum status for him and his wife.
The good times couldn't last forever, though: The Mint has since discontinued the dollar coin buying program.
A Small-Scale Alternative: Amazon Payments
Wilson then switched to a new method of buying money: Amazon Payments.
The No. 1 e-commerce retailer is now trying to challenge PayPal in the online payments world, and to gain traction, it's offering person-to-person payments without the fees charged by similar services. So, you can load money into your Amazon Payments account using your credit card, allowing you to rack up rewards for free. And while Amazon says it will shut you down if it finds that you're sending the money back to your own accounts, you can always "pay" a spouse, family member or trusted friend who has agreed to give you back your cash.
Wilson tells me that because of the monthly transaction cap of $1,000, Amazon Payments isn't really suited for racking up big rewards like he did with the Mint. It is, however, well-suited to a different sort of reward-hoarding: snagging new credit cards' sign-up bonuses.
Those bonuses require a specific level of expenditures within the first few months -- usually on the order of $1,000 a month, which is attainable if you're just shifting your usual spending onto the new card. But if you have multiple cards you've acquired just for the rewards, you run the risk of spending money you normally wouldn't just to get the bonus points.
The Amazon method has its drawbacks. The terms of service now list the monthly sending and receiving limit at $500, though they add that the limit could be "raised or removed entirely" if you add both a credit card and bank account to your account. And because of the ban on sending yourself money, you'll need a second person willing to send you your money back if you want to make it work.
But let's be honest: People churning cash through their accounts to gobble up credit card points isn't what Amazon had in mind when it introduced Amazon Payments. We'd hate to see a free P2P payments service go away because too many people were gaming the system.
The Prepaid Card Method
There's another method that sidesteps spending caps, but hits you with some fees: Buying prepaid debit cards with your rewards card.
One of the 5% bonus categories on my Chase Freedom card this quarter is drugstores, and most major drugstores sell prepaid debit cards in denominations up to $500. I could max out that category by buying myself $1,500 worth of debit cards at Walgreens, pocketing a tidy $75 in rewards. Like Wilson, I would be buying money to score rewards, albeit on a much smaller scale.
I'm not the first person to think of using prepaid cards to rack up rewards, but Wilson says that this particular scheme is on its way out.
"It's in the process of fading away," he says. "It's harder to get $500 cards with modest fees -- it seems like the $500 [card] has gone away. And it's hard to find places that have them and let you charge them."
The fees are definitely an issue: Most of the cards I found at the drugstore had a purchase fee around $5 or $6, lowering my haul to a more modest $60 if I bought three cards. Once again, then, this method makes the most sense if you're looking to snag a bunch of bonus rewards without straying beyond your usual budget.
If you sign up for a Chase Sapphire card, for instance, you can get 40,000 bonus points -- good for $400 cash or $500 in travel -- by spending $3,000 in the first three months. If that's not attainable through your usual spending habits, you could use the card to buy six $500 debit cards. Sure, you'll wind up paying $5 in fees on each one, but don't forget that you're getting an extra $15 by earning points at the usual 1% cash-back rate, which takes care of half the fees. At the end of the day, you're netting about $385 in cash just for opening a credit card account and going to the drugstore.
Who says there's no such thing as free money?
Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.