Manufactured spending is a common technique employed by travel hackers to earn huge travel rewards.
Essentially, you spend money with a credit card to earn miles, points, or reach a credit card sign-on bonus without spending money out of pocket.
There’s currently a big debate among travel hackers and travel hacking skeptics on the ethics (and legality) of manufactured spending. Let’s take a look at how it works and whether manufactured spending is fully legal.
What is manufactured spending?
Credit card issuers and merchants know that manufactured spending and credit card hacks exist. That’s why credit card companies and stores sometimes make rules to keep you from gaming the system.
Chase Bank recently added a rule called the 5/24 rule which prohibits issuing new credit cards to anyone who has opened five or more cards in the last 24 months. They’ve also put in strict rules on what purchases count as regular spending.
For example, you can’t take a cash advance to reach spending goals. You can only make regular purchases.
For a long time, travel hackers could buy reloadable cash cards at drug stores, supermarkets, office stores, convenience stores, and other merchants with a credit card.
However, the prepaid issuers and merchants caught on and made most of the cards cash only. So the travel hackers of the world had to come up with new methods to spend without really spending money.
Common methods today include buying gift cards with a credit card for stores you will shop at in the future. Grocery stores often sell Amazon, Apple, airline, and other gift cards. You can buy those with a credit card to reach your spending goals before the deadline.
Others may buy gift cards and attempt to liquidate them for cash or money orders online or at money order issuing businesses.
How does manufactured spending fit into travel hacking?
Credit cards, when used properly, offer access to amazing travel and cash back rewards. Thanks to my fourteen credit cards (and many others I’ve had in the past) I’ve taken free or heavily discounted trips to Europe and around the country on multiple occasions.
And with hundreds of thousands of airlines miles, hotel points, and travel program points saved up, I can go virtually anywhere in the world for pennies on the dollar compared to a full-price ticket.
All of this is usually possible thanks to big sign-up bonuses offered by credit cards, as well as miles and points I earn through everyday spending.
Due to rules banks have about issuing new credit cards, many travel hackers sign up for multiple new credit cards in a day. My personal record is four new cards in one day.
Each card typically has a minimum spend requirement to earn signup bonuses up to 100,000 miles or points. The day that I opened four credit cards at once, I needed to spend about $15,000 in three months to earn nearly 300,000 miles and points.
I don’t spend nearly that much, so I needed to find a way to spend on my cards without actually spending the money. Therefore, I used a combination of regular purchases and manufactured spending to get to that $15,000.
Where does ethics come into play?
Before we discuss whether or not manufactured spending is legal, we should look at the ethics.
Many credit card issuers hope you will get into the habit of using a new card during the introductory period. They know that isn’t always the case, but that is their goal.
That’s because banks and card issuers earn a lot of money when you use a credit card, even if you don’t pay interest.
Stores generally pay two to three percent of each transaction as a fee for processing credit card transactions. Therefore, card issuers still earn money from manufactured spending while merchants pay the fees.
As long as you follow all of the rules and don’t do anything against your credit card’s user agreements, you’re usually safe when it comes to manufactured spending.
How you feel about it is another story.
What’s the legality of manufactured spending?
At the end of the day if it feels wrong, don’t do it. But if you don’t think it seems wrong then you’re in luck, because there are currently no laws that prohibit manufactured spending.
However, if you open a credit card that prohibits this activity, you may be in breach of contract with your card issuer. And your worst case scenario is that they will close your account and refuse to offer you new accounts.
Unfortunately for those in pursuit of credit card miles and points, many of the methods used for manufactured spending are also used by criminals for money laundering. Because of this, pre-paid gift cards have drawn some attention from the government, as some criminals could use them to launder drug money or other illegally obtained funds.
Therefore, if you are involved in a cash transaction greater than $10,000, a currency transaction report is required by the U.S. Treasury Department. But, since you’re racking up airline miles rather than illegal money laundering profits, you don’t have anything to worry about from those forms.
On the other hand, when dealing with gift cards, it’s more of a gray area.
Is it worth the risks and hassles?
With all of this in mind, is manufactured spending worthwhile? Well, it really depends on your travel hacking goals and how hard you are willing to work to make them happen.
For me personally, I don’t do much manufactured spending these days. And the 5/24 rule is holding me back from the new Holy Grail of rewards cards, the new Chase Sapphire Reserve. So I’m laying low with new card applications to get that one.
Further, the rewards for manufactured spending are slowly shrinking while the hassles increase. I now only use manufactured spending to hit sign-on bonuses that I would not reach with regular spending.
It’s a lot of work, but the rewards can be massive. And if that sounds like something you’re interested in, you can give manufactured spending a try without worrying about legal ramifications.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|