Manufactured spending. What does that mean? It’s not apparent from the name, but a good guess would be that it has something to do with spending money concerning travel since I’m writing about it on a blog dealing with points, miles and travel.
I’m personally no expert on the topic. I know some of the basics of what’s involved in the process. I’ve dabbled with some of the more straightforward methods here and there, but I’m not a regular practitioner.
For those of you who know what manufactured spending is, there’s not going to be anything new in this article, unless you want to read someone who has a basic understanding of the topic explaining it to someone who has never heard of it before.
I don’t think there’s a set definition of manufactured spending (MS). My best attempt is that manufactured spending is any method used to spend money multiple times through a financial instrument, to earn some form of reward.
What’s the basic principle of manufactured spending?
I’ve said many times that the best way to earn points and miles is through credit card spending. You can sign up for cards and earn sign up bonuses. It’s also a good idea to maximize earning on your everyday spending, whether that’s for restaurants, groceries, gasoline or non-bonused spending.
If you have $1,000, you can spend that on the above categories and possibly earn 5,000 points or more if you maximize every dollar. But if there’s a better way to get points with that same $1,000.
I’ll use a casino analogy here; just don’t think I’m saying that manufactured spending is like gambling.
Say that you’re going to sit at a slot machine. You know that for every $1 you put into the machine, you’ll get 90 cents back. For every $1 you spend, you’ll also get 5 points in the loyalty program. Starting with the same $1,000, after playing 10 rounds, losing 10% of your money each time, you’ll have $348.67 remaining. However, you will have put $6,511 through the machine. Since you earn 5 points per dollar, you’ll have 32,562 loyalty points.
By continuing to cycle your money through the machine, you were able to earn many more points with your $1,000 than merely by spending the money. You earned 32,562 points and spent $651.33. It ended up costing you about 2 cents for every point you received.
The basis of manufactured spending is recycling the same money through the system, earning points or miles or cashback every time you repeat the process. The above example also shows one of the downsides of MS. It’s not free.
All manufactured spending techniques have costs involved. Making the system work is to make sure the rewards you earn are worth more than the money you spend. There are two sides to that equation that you can use to increase your value when MSing. You can try to lower the cost of acquiring the points or you can earn more points, or more valuable points, for each transaction.
Types of Manufactured Spending
There are many different techniques used by people who manufacture spending.
Buying Cash Value Gift Cards – This procedure involves buying gift cards with a cash value. While it’s possible to use the card to pay other charges, the goal with MS is to liquidate the card as quickly as possible to reuse the funds. With MS, the primary way is to use the gift cards to purchase money orders, which can then be used to pay off the credit card bill. Repeat the process over and over.
Expenses: The gift cards usually have an activation fee and there are also costs in getting money orders. Lowering the activation cost can significantly change the value proposition of this MS method, thus all of the excitement over Simon Malls offering a $1,000 gift card with only a $3.95 activation fee or when you see an offer of a no-activation-fee gift card.
Buying Store Gift Cards – This process involves buying gift cards for a single store, such as Amazon.com, McDonald’s or Macy’s. There are online websites where you can sell gift cards to liquidate the money spent.
Expenses: These gift cards don’t have an activation fee. However, you have to take a loss on reselling them online. The re-selling websites also take a cut of the sale price.
Reselling Merchandise – This is an even riskier process that can be very lucrative and even turn into a business of its own. You purchase items when on sale, or if you get an excellent bonus for a shopping portal. You then resell the items on eBay or Amazon (or any other online selling site).
Expenses: You’ll have to pay the costs of selling the item to the online portal and usually the shipping costs. In most cases, you’ll have to sell the item for less than you purchased it for so it’s possible to take a considerable loss.
Online Loan Websites – There are online sites that specialize in microloans. One such site is Kiva, which is a non-profit that loans money to people in developing countries. You can choose to fund part of a loan, which gets paid back over time. This is a long term way of manufacturing spending as it can take months to years to recover your investment.
Why Go Through All This Trouble
There are several reasons why people use manufactured spending techniques.
Meet Minimum Spending Requirements – If you don’t spend a great deal of money each month on expenses, it can be challenging to reach some cards’ minimum spending requirements to earn the signup bonus. With thresholds of up to $5,000 to $10,000, this is a way to meet those requirements.
Reach Spending Thresholds – Several co-brand cards offer bonuses when reaching spending thresholds. The World of Hyatt card gives an extra free night at a category 1-4 hotel if you spend $15,000 on the card in a year. The British Airways card offers a travel together ticket if you spend $30,000 on the card. While that’s a bunch of spending to put on a single card, it’s easily reachable if you’re using manufactured spending techniques.
Earn Status Levels – Spending on co-brand cards can also help you get status. It could be a certain status level for spending a specific amount or earning a number of credits to be used for status for an incremental amount of spending. Airlines used to allow you to waive the spending requirement for status by spending on credit cards, but more and more of those waivers are going away (or getting much harder to achieve).
Just For The Points and Miles – While many people do MS for the above reasons, some do it to earn more points and miles. If you’re able to manufacture points and save up to 75% on a hotel room or airfare price, why wouldn’t you?
Isn’t This Risky?
Yes. This process isn’t risk-free. Many things can go wrong. The best advice I’ve heard from those who do this is that you should never spend more money on MS practices than you’d be willing to have held up in limbo for a few months.
On top of this, some banks, particularly American Express, are cracking down on people who practice these techniques. AMEX no longer pays category bonuses for gift card purchases and will deny sign up bonuses if you purchase even a single gift card during the initial sign-up period. Their RAT Team has even shut down whole account portfolios of people who took the practice way too far. Most MS practitioners have left AMEX altogether due to the hassles.
Do You Still Want To Learn More?
The world of manufactured spending is vast and deep. There are day-long frequent traveler conferences that do nothing but talk about all of the different ways to manufacture spending. Going to these and talking with someone who goes to the mall and purchases $10,000 in gift cards every week only to go to Walmart to get money orders to deposit into the bank to pay off the account just to repeat the next week still makes MY mind spin.
If you’d like to learn more, I suggest reading the Manufactured Spending Complete Guide on Frequent Miler’s website. It goes more in-depth into the different areas of MS and other ways to spend money on your credit cards without buying anything.
I hope this gave you a glimpse into the world of manufactured spending. There’s a lot to cover, but knowing the whats, hows and whys is a good start, and hopefully, you’ll be able to decide if it’s something you’ll want to learn more about.
FWIW, we don’t do many MS things in our household. I’ll pay attention to discounted store gift card notices because I might buy some for my personal use, not to resell them. I don’t have the time to run around buying and liquidating gift cards and we’re able to earn enough miles for our travels through other means.
But that’s our situation. Your Mileage May Vary.
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This post first appeared on Your Mileage May Vary