Multiply reward points with prepaid and reload cards

Money shuffle earns rewards at every turn

By Cathleen McCarthy

Rewards strategists are discovering new ways to multiply points and miles fast using prepaid and reload cards. It's a bit like getting rewards for a cash advance, then using the advance to pay large bills without incurring convenience fees. In some instances you can even pay the bill for your rewards credit card with your prepaid, indirectly earning rewards twice for a purchase.

"It's stupid to not take advantage of this concept of buying reloadable cards with your miles-earning credit card and then loading them onto prepaid cards that you can then use throughout your daily life," says Brian Kelly, who blogs at The Points Guy. "Instead of just earning one or two points per dollar, you can earn five points per dollar or more."                                           

Here's how to do it:

Step 1: Open a reloadable debit or prepaid card account
Prepaid cards are connected to payment-processing networks such as PayPal, American Express, Visa and MasterCard. You can fund these prepaid accounts through your bank account or direct deposit, but if you want to maximize rewards, fund them using a compatible reload card, also sometimes called a "pack."

Step 2: Purchase reload card -- using a rewards card
Reload cards can be found on the gift card racks in stores. You move the value of a reload card or pack -- typically $20 to $500 -- to other financial instruments such as prepaid cards or a PayPal account. An additional fee of $3.95 or $4.95 is charged for each reload card you buy.

The trick is to pay for the reload cards with a credit card that awards extra points for that type of purchase. Using a standard rewards card, you will usually get only one point per dollar spent -- 500 points for a $500 reload card. Given that there's a fee of up to $4.95 for the reload card, you'd be losing money and wasting effort doing that.

But using a credit card that gets more than one point per dollar at the drug stores or office supply stores that sell reload cards makes all the difference. For instance, Hilton's American Express card awards you six points per dollar spent at drug stores. That means you could earn 3,005 points buying a Green Dot MoneyPak reloadable card for $504.95 ($500 in funds, plus a $4.95 fee) at Rite Aid or other drug stores that sell MoneyPak. Chase Freedom and Citi Dividend are offering 5 percent cash back on drug store purchases through March.

Another option is to buy Vanilla reload cards (not to be confused with Vanilla gift cards, which are something different). They work well with Bluebird, the prepaid card that American Express launched in October with Wal-Mart. Vanilla reload cards cost $3.95 each and you can load up to $1,000 per day into a Bluebird account via vanillareload.com.

Step 3. Spend your prepaid card and reload
You've now just essentially transformed your money from one form (cash) into another (prepaid card), using your credit card to earn a nice stash of rewards points on the transaction. To really earn big, you need to use that prepaid on as many of your regular expenditures as is financially worthwhile so that you can reload as often as possible. The reloading is where you earn the points.

The beauty with some prepaids is that you can use them to pay large, recurring bills such as rent, mortgage or car payments -- without a fee. Usually, paying these types of bills with a credit card incurs fees from the loan or utility company. But a Bluebird account, for example, comes with a no-fee online bill-pay feature that sends a check to the payee. It's as if you were paying from a bank account.

Example: To see how quickly you can rack up points, consider buying Vanilla cards at a drug or grocery store with a rewards card that offers bonuses in those categories. Using a Hilton credit card, for example, gets you six points per dollar -- or 3,024 reward points for a $503.95 Vanilla card. If you bought four of those cards to make a $2,000 rent payment, you could earn 12,000 HHonors points -- nearly enough for a free night at a level-2 Hilton. The total cost would be $19.80 in reload fees -- not bad, for people don't regularly earn a lot of points through travel.

You can even pay your credit card bill with Bluebird -- meaning that if you earned points when you paid for your purchases, you're earning twice on each purchase.

Wildcard: fund a PayPal account with MoneyPak
One other way to tap the reload/prepaid scenario for points is to use a MoneyPak reloadable card to fund a PayPal account. This is appealing because you can transfer money from your PayPal account to your checking account. MoneyPak can also fund an American Express Serve account via moneypak.com. (Serve is an online payment system similar to PayPal that allows users to transfer money, withdraw money from ATMs and shop online or in stores.)

But there's a caveat. PayPal has been known to send warnings to people who transfer funds into PayPal via MoneyPak and then right out again into their checking accounts. PayPal makes its profit by charging fees on purchases made from PayPal accounts. If you simply use the account as a money transfer vehicle, PayPal will call you on it.

Just ask The Points Guy's Kelly. He was recently reprimanded by PayPal after loading the maximum allowed MoneyPak funds ($4,000) into his PayPal account, then immediately transferring it all to his checking account. He says the PayPal route is probably better for people who actively use PayPal for purchases.

Follow the moving retail target
Frequent flier bloggers have been obsessed with this game ever since the Vanilla/Bluebird/rewards card trifecta was discovered by miles collectors a few months ago. In fact, buying Vanilla cards at Office Depot with a Chase Ink Bold card became so popular -- in a bad way -- that Office Depot stopped carrying Vanilla cards. "It was mayhem," Kelly says. "There were fraud issues, theft issues. I don't think Office Depot was making enough on this product to justify the headache."

Kelly and Greg Davis-Kean, who blog at Frequent Miler, both recommend CVS as the next best option, having purchased Vanilla cards successfully using several different rewards cards. However, certain CVS stores have stopped accepting credit cards for reload card purchases. As both retailers and card issuers introduce new restrictions, Davis-Kean predicts: "We're going to have a moving target with this strategy."

In fact, an inside-joke-filled video about the Vanilla/Bluebird strategy as a Hitler war room parody is circulating.

Besides keeping up with changing rules, if you want to earn points with reloads you have to be willing to drive to a store to buy cards, then manually load an account in order to pay your bills. "I think you have to be committed to buying at least $2,000 worth of reload cards a month to benefit from this," Davis-Kean says. "If you're only getting $200 worth now and then, points earned are not worth the effort."

Avoiding red flags and fraud alerts
Even the most savvy mileage collectors are running into roadblocks. Along with Kelly's warning from PayPal, one of his commenters was contacted by the AmEx fraud department after trying to charge two $500 Vanilla cards from CVS on his AmEx Hilton HHonors Surpass card. The second purchase was declined, though he suspects the fact that he was making the charges while traveling may have been a factor.

Some suspect American Express will introduce restrictions on buying reload cards with credit cards. "Banks are not concerned with frequent flier mile collectors," Kelly says. "They're concerned with money launderers -- drug dealers, terrorists -- who buy these cards. It cleans up the money when you pay for these cards, turns them into credit and then back into cash."

Kelly warns it's hard for companies to tell the drug dealers from the mileage collectors. Red flags go up if you buy lots of reload cards and turn them back into cash right away. "Credit card companies also know that right before people declare bankruptcy, they max out their credit cards," he says.

While Kelly and other frequent flier bloggers tend to push these strategies to the limit, most people won't run into trouble if they incorporate this practice into active, normal use of their accounts. "If credit card companies and retailers did not want people to earn points on these purchases," Kelly says, "they simply would not allow people to use credit cards to purchase them."

See related: Taxes, tuition can rack up rewards, for a fee, 3 trends shaping today's rewards credit cards, 8 ways to maximize your credit card rewards points

Published: January 11, 2013

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