Using Prepaid Cards to Boost Rewards

Dear Cashing In,

To get extra reward points, I used to buy Vanilla Reload cards on credit from a pharmacy nearby, then load a Bluebird account and pay my rent with it. But now the store won't accept credit cards for Vanilla Reloads -- only cash or debit. What are some alternative ways to boost my points with prepaid and reloadable cards?

-Jamie

Dear Jamie,

For some people, talk about reloadable and prepaid cards can seem like listening to a foreign language. Many of us have little experience with those cards, except perhaps having received a gift card or using a retailer's prepaid card (such as at Starbucks).

Prepaid and reloadable cards are one of the fastest-growing segments in the payments industry. They are an alternative to stashing money in a traditional bank, and they are available to people with poor or nonexistent credit histories. As the name implies, prepaid cards have money on them at the time of purchase, which then draws down as the card is used. Some cards have fixed values -- such as, say, a $50 Visa gift card your grandma gave you for your birthday -- while others can increase in value if you add money to them at retailers or online.

However, as you point out, there are also ways for reward-minded consumers to take advantage of prepaid and reloadable cards. Generally, the idea is to buy a prepaid debit card using a rewards credit card, earn reward points for that purchase, then use the prepaid card to pay for expenses that can't be paid for with a credit card -- such as rent, mortgage payments and other bills. Sometimes you can withdraw the money from an ATM or buy a money order and deposit the cash back into your bank account, although making large, unexplained deposits is generally not a great idea.

This approach can be especially lucrative if you can buy the prepaid cards from a store for which you receive extra reward miles. There are credit cards on the market, for instance, that offer six points per dollar at grocery stores and five points per dollar at office supply stores.

There are small fees for buying prepaid cards, but other than those, this technique doesn't really increase your overall spending. Rather, it shifts more of your non-credit-card spending to a rewards-earning credit card. It has the effect of turning credit into cash, but without the sky-high cash-advance fees charged on most credit cards.

However, the trick is finding places that will sell prepaid cards on credit. In the past year or so, retailers including CVS and Office Depot changed their policies and either stopped selling higher denomination gift cards or accept cash or debit only. Another popular card for this purpose, Green Dot's MoneyPak reloadable card, is being phased out because of concerns about fraud, the company announced last month.

Even with those changes, though, there are still ways to increase your reward balances with prepaid cards. Some retailers still sell gift cards to customers using credit cards. From there, you could transfer the balance of the gift card onto the Bluebird card, a reloadable American Express debit card that can be loaded in person at Walmart. You can pay bills directly with your Bluebird account online.

Another option is to use PayPal or Amazon Payments to pay bills or send money to a friend using the prepaid card. If you take a minute to peruse blogs or discussion boards on the topic of "manufactured spending," you'll see plenty of other potential products and combinations.

In the end, pursuing this strategy can get tricky and time-consuming, and it is not free. Make sure to weigh the benefits against the potential costs.