There are significant risks that come along with credit card rewards programs, particularly for those who, in general, are not great at managing credit cards. But for those who are financially stable and always pay off their balances, there are plenty of ways to game the system and maximize credit card rewards. Whether it’s points, cash back, or a one-time sign-on bonus, these perks can amount to free money for making purchases you would have made anyway. Here are some ways cardholders are making the most of their credit card rewards.
Loading up on rewards cards
Different credit cards reward some types of purchases, such as groceries, gasoline, or travel, more than others. Some cardholders see this as a challenge to maximize their profits while maintaining a great credit score. In a LearnVest article explaining how he takes full advantage of rewards, Greg Haney, a financial analyst, wrote that he has 13 credit cards that he uses to maximize cash back and points. He keeps track of the cards on an excel spreadsheet to help him remember which cards should be used for which purchases. With this method, he gets more than 5% back on nearly every purchase.
Haney cautioned readers that a large number of open credit accounts will severely affect your credit score, but in his case, having so many cards actually boosted his score because all of the accounts are in good standing with no late payments. Vitaly Pecharsky of Slickdeals told The Cheat Sheet he has 35 total credit cards, 12 to 15 of which he uses regularly. Pecharsky claims he makes $3,000 to $4,000 annually in cash back rewards alone for purchases he would have made anyway.
Credit card churning
Credit card churning essentially refers to signing up for new credit cards just for the sign-on bonuses and rewards. This could mean you simply load up on credit cards, or it could mean you are constantly closing old cards when they become less desirable (or before the annual fee kicks in) and then moving on to the next attractive offer from a credit card company. Some churners will even close accounts and later reapply for the same card to get the bonus again. A few card issuers are cracking down on this practice by limiting the number of times they will award a sign-on bonus. Others might blacklist you from future cards if you close your account right after collecting your bonus or take your points away if you “misuse” the rewards program.
While credit card churning is a controversial strategy, there are ways to minimize damage to your credit score. Some proponents recommend leaving some accounts open, even if you don’t use the card, as long as there is no annual fee. It can also be helpful to monitor your score on a website like CreditKarma, so you can see how opening and closing accounts is impacting your score. Brad Barrett of Richmond Savers told Lifehacker, “It always comes back to paying your card in full and on time every single month. As long as you do that, you will inevitably build up an excellent credit rating and you can then look to open credit cards for these specific bonuses.”
Perhaps the most risky and controversial rewards strategy, manufactured spending refers to using rewards credit cards to purchase gift cards or prepaid cards that you expect to use later. This way, you will be racking up points or earning a sign-on bonus quickly without making a bunch of individual purchases. In more extreme examples, some cardholders use their rewards cards to purchase things that can be quickly converted back into cash. Before these practices were shut down, U.S. Mint coins or Amazon Payments could be exploited to move money around without actually buying anything, so rewards chasers could put a charge on their card and then pay it back right away, walking off with loads of rewards.
Another common way to play the rewards game is by loading up a “Redbird” card, or American Express Target Redcard, though Target has reportedly stopped allowing these credit card loads. There are a multitude of forums on Reddit and other websites where rewards chasers discuss the manufactured spending landscape, which seems to be constantly changing as credit card companies and retailers catch on to what is going on. While card loading and manufactured spending can be performed legally, the practice is undoubtedly risky, and it’s easy to make costly mistakes.
The risks of chasing rewards
Chasing credit card rewards is a bad idea for many, many consumers. Rewards credit cards generally have higher interest rates, sometimes have annual fees, and the terms can change at any time. The Consumer Financial Protection Bureau is looking into these programs to ensure they have clear disclosures. Even those who clearly understand the rules of a rewards program may spend more money than normal, without realizing it, just to rack up more points or cash back. That’s why it is important to only choose cards that will work well for you.
Rewards cards are not useful for people with a history of mismanaging credit cards or missing payments. But for people with excellent credit who are incredibly organized, a reasonable amount of chasing can pay off. If keeping track of a large number of rewards cards sounds daunting, stick with one or two that mirror your most common purchases.
No matter what you do, just don’t pay a dime in interest. The ultimate way to game the credit card system is to always pay your balance in full.