By The Pointer
A few months ago, my finances were looking great. I was approaching my one year anniversary of declaring financial independence, and the stock market was going up, up, up. Then…COVID-19. The stock market took a nose dive. At the same time, I hadn’t been able to sell my condo so my housing expenses were higher than what I had budgeted for.
I needed some money to keep my finances on track. Clearly, going back to the W-2 work force would be a fate worse than death so I came up with a plan.
Before I go into the details of my plan, I have to caveat that this approach isn’t for everyone. I’ve picked up skills through travel hacking, and I have assets like good credit that allow me to pursue this plan. Not everyone is in a position to replicate it, but if you are, hopefully this post helps.
Table of Contents
Component 1: Bank Account Bonuses ($3,600)
Banks often offer you a cash bonus to open an account with them (along with a few other requirements). There are TONS of banks that offer these incentives. Doctor of Credit has an excellent Best Bank Account Bonuses section with a list of what’s available. The bonus values vary, but I think I could easily open 1 account per month worth $300 each (on average). That would be $3,600 per year.
Nowadays, pretty much every bank lets you sign up online. Most of the requirements to get that bonus (minimum deposits, direct deposits, etc.) can also be managed online. The time commitment to get these bonuses is pretty much negligible. To earn $300 for what probably totals 30 minutes of effort is a $600/hour wage. That sounds pretty good to me!
With unorthodox financial tactics like this, people often have questions and concerns. While everyone’s individual situation is different, I can address some of the common concerns from my own perspective:
- Won’t the banks shut you down? – Maybe. ChexSystems produces a banking report on you just like Experian, Equifax and Transunion produce credit reports on you. The Chex report is primarily to make sure you weren’t running up fees and bouncing checks with one bank, then withdrawing your money so you can try the same thing with another bank. The report also tracks how many accounts you’ve sign up for. Some banks are sensitive about customers who have signed up for a lot of accounts recently, but that’s more the exception than the rule. The worst they can do is say “no” to you.
- Won’t this hurt your credit? – No. I don’t plan to rack up fees that won’t be paid (so no derogatory marks or missed payments). Also, when you open an account there usually isn’t a hard inquiry on your credit report, like when you open a credit card. Instead, banks typically do a soft pull, which has no impact on your credit score. Again, I rely on Doctor of Credit to confirm whether the bank will do a hard pull or soft pull. If you search the bank and account type on the Doctor of Credit site, you’ll typically get an overview of the sign up offer, including the type of pull.
- What about the account fees? – There usually aren’t any fees or I factor them in. I go out of my way to avoid banks with high monthly fees that are hard to waive. If I can’t avoid them, I factor the fees into my view of the bonus. For example, I’d take a $350 bonus for a fee-free account over a $400 bonus for an account with $25/month fees that I’d have to keep open for 4 months.
- Won’t this require you to hold a lot of cash, which hurts your portfolio performance? – Not necessarily. I favor accounts that have direct deposit requirements instead of requiring a certain cash balance.
- How do you meet direct deposit requirements when you don’t have an employer? – Certain bank-to-bank transfers are counted direct deposits. Again, Doctor of Credit has a page to help with this. It shows you how, for example, a normal transfer from Charles Schwab often gets counted as a direct deposit in Capital One 360 accounts.
- What about taxes? – Yes, bank account bonuses are reported as taxable interest. That’s something most people will have to take into account, but my income is low enough that I probably won’t have to pay taxes.
Component 2: Credit Card Cash Signup Bonuses ($7,200)
In the same way that I can rack up bank account bonuses, I plan to rack up cash from credit card account bonuses. My expectation is that I can sign up for 2 cards per month with bonuses worth $300 each. That would mean $7,200 per year. The best part is that credit card bonuses (unlike bank bonuses) are considered rebates so they’re not taxable.
In the future, I hope to complete my “Best Offers” section so you can easily browse for the best credit cards for you. Until then, I’d suggest the Frequent Miler’s version of this page. He also shows the best offer for the applicant (rather than the offer with the best commission for him), but the information on his page is often out of date. Still, it’s the soon-to-be-second-best option available.
Now for the obvious questions:
- Aren’t credit cards evil? – You’re way behind on your reading with this website. I spent an entire post going over this question, and why I think the answer is “no” if you can manage credit responsibly.
- Won’t this hurt your credit score? – Not if I do it carefully. That same post that I was referring to goes into depth about the myths around credit scores. One of the biggest myths is that signing up for new credit cards will hurt your credit score.
- That’s a lot of credit cards. Is it too many? – Maybe. For me, this is pretty standard. If you’ve never had a credit card before, and you start signing up for 2 per month, you’ll probably raise red flags. Again, the worst that can happen is that you get a hard inquiry (minor negative impact on your credit score) and they deny your application.
- We’re probably in a recession. What if companies stop offering these bonuses? – It’s possible. Even in tougher financial times, companies still compete for customers. Bonus values may decrease, but my expectation is that companies are more likely to raise their approval standards or minimum spending requirements.
- You have a pretty small budget. How will you meet the minimum spending requirements for these cards? – Mostly through manufactured spending. I’ll go through that a bit more in the next section.
Component 3: Manufactured Spending ($2,378)
Manufactured spending is the process where you buy something similar to cash (like a Visa gift card) with a credit card so you can easily cash it out (to pay the credit bill) while earning rewards for the transaction. For example, let’s say you have a credit card that earns 2% cash back. You could go to a Simon Mall to buy a $1,000 Visa debit gift card for a $3.95 fee. You’d earn $1,003.95 x 2% = $20.08 in rewards. Let’s say your local Wal-Mart or grocery store charges you $1 to buy a $1,000 money order, and they accept your debit gift card to pay for the money order. Then, you earned $20.08 minus $4.95 in fees to net a profit of $15.13.
The tricky part is in the details. Not every store sells high-value, widely accepted debit gift cards. Not every store that sells money orders will let you pay with a gift card. Sometimes, the fees are so high that it’s not worth doing.
You also need to do a certain amount of volume to make the process worthwhile. For example, I wouldn’t bother going to the mall and the grocery store (assuming there wasn’t a pandemic) for just $15 in net earnings. However, I would consider it if I was buying ten $1,000 gift cards, and liquidating them. Then, we’re talking about $150 in earnings for the same amount of time/effort.
Using methods that I can easily incorporate into my regular walks, I project that I can generate $2,378 in net earnings over the next year. That probably seems low, but there are several things to keep in mind:
- About half of my manufactured spending will go toward meeting minimum spending requirements on new credit cards (see above).
- Most liquidation methods have limits. For example, banks will probably be concerned that you’re a drug dealer if you’re depositing $100K in money orders each month.
- I’m not looking to spend lots of time doing this. To me, it’s an occasional side trip to generate a little income.
Now for the common questions:
- Won’t the credit card companies notice what you’re doing? – Maybe. Most of them just know that you’re a big spender that pays their bill on time. They usually don’t look harder unless you give them a reason to. Plenty of people do have their accounts shut down for this, but it’s the exception rather than the rule. I’m considering it a calculated risk.
- Credit card agreements usually say that gift cards don’t earn cash back. How is this possible? – The reality is that most credit card companies don’t know whether your $1,000 charge at CVS was for gift cards or a prescription.
- What are your methods for earning and liquidation? – I’m not telling. That’s not to be an asshole. That’s common practice in the world of manufactured spending. Many of these methods fly under the radar because they aren’t widely known. When they are shared it’s usually an exchange (I’ll show you mine if you show me yours) and in a way that’s not mass communicated (eg. an in-person conversation). This approach keeps MS methods sustainable.
Component 4: Credit Card Piggybacking ($1,200)
Over the years, I’ve accumulated A LOT of credit cards. Most of them just sat dormant until I discovered that people would be willing to pay a fee to become authorized users on those cards. This is called credit card piggybacking.
If you’re a recently graduated student or an immigrant to the United States, chances are that you have no credit history. You may need a temporary boost to your credit so you can rent an apartment or buy a car. By becoming an authorized user on someone else’s credit card, you inherit the history of that card on your credit report (years of on-time payment history, the card’s high credit limit and low utilization percentage, etc.). However, the cardholder doesn’t have to inherit any of the authorized user’s history.
People who need this service typically contact a piggyback company that connects them with card holders like me. In exchange for the service, the company gets a fee that I get a piece of.
I’ve been doing this for two years. It hasn’t been incredibly lucrative, but it is incredibly easy. Last year, I made a little over $1,200 doing it so I’m confident I can do the same this year. There has been a huge influx of business since mortgage rates went down. I assume that many people are, understandably, looking to boost their credit scores so they can take advantage of those low rates.
People tend to panic when I mention piggybacking. Let me dissuade some fears:
- What if the authorized user runs up your credit card bill? – They don’t get a card. The authorized user’s credit card is mailed to you, the cardholder. You can destroy the AU’s card the second you get it.
- Won’t the credit card company shut you down? – Maybe, but probably not. This is another area where there is risk, but it can be managed. Most credit card companies don’t have explicit prohibitions on piggybacking. However, they wouldn’t like it if you asked them. It may raise concern if you’re constantly adding and removing multiple users on the same card. Usually, demand isn’t high enough that you’re in that situation. Also, a good piggybacking service will place limits on how many authorized users are added to your card and how frequently. They have tons of experience in this areas to help their cardholders.
- What are the earning rates? – The chart below summarizes what the piggybacking company I currently work with pays. The amounts are per authorized user. To be paid, your card has to successfully appear on their credit report. That usually means you have to have some activity on the card so that a statement is generated. Then, you’re paid 2 months after that successful posting. Typically, the user stays on your card 2-3 months to avoid raising concerns from the credit card company.
The Pointer’s Take
I’m in the fortunate position of having assets and skills that I can leverage. With minimal effort, I can make decent money with a minimal time investment. Hopefully, all or some part of this approach is useful to you. If you have some better, be sure to let me know.