A while back, a colleague was asking me some questions about manufactured spending. In response, I wrote up a guide to manufactured spending. Here it is again, updated to reflect the unfortunate demise of Amazon Payments.

Dollar Coins: The Original Manufactured Spending

Several years ago the U.S. Mint started producing presidential dollar coins, but discovered that it couldn’t get them into circulation; banks simply wouldn’t order the coins because wide-scale demand didn’t exist. Someone at the mint had a genius idea: Allow people to purchase small quantities of coins ($500-$5000) using a credit card and ship the coins to the customer for free. The mint could get coins into the hands of people who wanted them quickly and efficiently. It didn’t take many people long to figure that you could purchase coins with a credit card that earned a cash-back reward, immediately deposit those coins at a bank, pay off the credit card and make a profit. If you had a credit card that earned 2% cash-back and you purchased $5000, your profit would be $100. Circulate $500,000 and your profit is $10,000. (And yes, I know people who were circulating much more than that!)

The U.S. Mint’s program is long-gone, but the idea still remains: Purchase something that can be quickly converted into cash for the purpose of earning credit card rewards.

Why would someone want to do this?

There are many reasons why one might want to manufacture spending on credit cards:

• Meet a large spending threshold for a credit card signup bonus – The most lucrative credit card signup bonuses often require you to spend $10,000 on your credit card within a few months. If I weren’t traveling for business, this would be VERY hard to do. Manufactured spending is an easy(ish) way to do this.
• Earning ongoing rewards – If you can manufacture spending efficiently enough, you can use it to earn credit card rewards in excess of your costs.
• Challenge – Personally, I enjoy the challenge of learning more about how financial products work. At my employer, I’m the go-to guy for questions about miles and points. Figuring out what products are out there and how they work keeps my knowledge fresh.

Manufactured spending opportunities

American Express has a product called Bluebird that can be reloaded using another product called Vanilla Reload. Until recently, CVS sold Vanilla Reload cards to customers paying with credit cards. If you had a credit card that earned 5% back at drug stores, you could earn an easy $250/month in one trip to CVS by purchasing $5000 of Vanilla Reload cards, loading them onto your Bluebird card, and transferring the money from your Bluebird card back to your bank account. CVS no longer sells Vanilla Reload cards to customers paying with credit cards, but there are still merchants who do.

One of the easiest ways to liquidate debit cards over the last year was Amazon Payments, which would allow sending another person up to $1,000 each month using a credit card for free. My roommate and I have used Amazon Payments to send each other money for household expenses. I don’t expect this to be the end of payment services, so look for other opportunities in this space.

Money can be loaded into your PayPal account using a product called PayPal Cash. After loading your PayPal account with a PayPal Cash card, you can simply transfer the money back to your bank account. Similar to loading American Express Bluebird with Vanilla Reload packs, the trick is finding a merchant that will sell you PayPal Cash cards with a credit card. A word of warning though, PayPal has been known to freeze accounts that are being used solely for unloading PayPal Cash cards.

The above are only three well known manufactured spending techniques. There are countless more.

A few words of warning

First, the necessary disclaimer: I am not a lawyer. I do not represent you. I am not your tax adviser. Nothing that I say here should be taken as legal advice.

Manufactured spending does not come without risks. You should be aware of all of the following:

• Carrying around large amounts of cash equivalents can be dangerous. Be smart about this. Don’t carry around $5,000 of Vanilla Reload cards all day.
• Your prepaid card isn’t as secure as an FDIC-insured bank account. There is a small possibility that InComm, the company that offers Vanilla Reload cards, could go bankrupt and you could be out of luck. Granted, this is very, very, very unlikely to happen, but the possibility still exists.
• The game can change at any time. It is possible that you could purchase $4,000 of PayPal Cash cards, only to learn that PayPal changed its terms and you can now only load $500 per month to PayPal.
• Be prepared to be without your money for a while. Financial institutions can and do freeze accounts while they investigate suspicious activity, and sometimes what is “suspicious” is defined quite liberally. PayPal is known to do this. The Consumer Financial Protection Bureau is your friend here.
• Banks and other financial institutions are required to file reports for financial transactions that appear suspicious. Be aware of this, but don’t be worried by it.
• Do NOT attempt to split purchases of gift cards or bank deposits in order to avoid the above-mentioned reporting. See also: http://en.wikipedia.org/wiki/Structuring

Where can you learn more?

• FatWallet Finance Forum – This is where I got my start in manufactured spending almost a decade ago.
• FlyerTalk Manufactured Spending Forum – You can find comprehensive information about almost every manufactured spending opportunity that is currently publicly discussed on this forum.
• Frequent Miler – Historically, The Frequent Miler has put out a lot of good information about the more well-known manufactured spending techniques. Read through his old posts to understand how the manufactured spending game developed over the years.

What’s next?

Now that you have your primer, go scour your local gas stations and grocery stores for Vanilla Reload cards, get a Bluebird card, and start searching for services that allow your to pay others with a credit card. Also, let me know what you think of this post, or if you have a favorite manufactured spending technique you’re willing to share, leave it in the comments.