How to Get (Almost) Free Credit Card Rewards

What if you could get cash back for paying your mortgage? Because you pay for some of your biggest monthly expenditures out of your bank account, you don’t earn anything for all that spending, unlike the rewards you might earn for credit card purchases.

But a new and popular tactic allows you to earn cash back or points by paying for monthly expenses that often aren't allowed with your credit card, or that might incur a hefty “convenience” fee if they are, such as rent or mortgage payments, college tuition, auto loans, health-care expenses, insurance, maintenance fees, or utility bills. You get around the restrictions and fees by paying those bills with reloadable prepaid cards, which have similar features to checking accounts, including check writing and online bill pay.

The trick to getting the rewards, which prepaid cards don’t offer, is to put money onto the prepaid card with a credit card that does. The key step is that you buy a reload card at a pharmacy or convenience store on your credit card, thereby earning the rewards. This reload card can’t be used to make purchases - you just use it to add money to a prepaid card. (This extra step of buying a reload card is the only way of getting money onto a reloadable prepaid card, while still getting the rewards). You then pay your bills with that prepaid card.

But you have to minimize the fees typically incurred by prepaid cards to make this a worthwhile exercise. Here’s how to score the points, while dodging the fees:

1. If you don't have a good rewards card, open one with a generous rewards structure. Look for a card paying 2 percent cash back (or close to it) on all purchases and that also comes with a big upfront bonus. These bonuses, often 25,000 to 50,000 points, require a certain amount of spending, say $3,000 within the first three months. See our guide to rewards cards, if you don’t already have a good one.

2. Second, open a prepaid card account. Take a look at the Bluebird from American Express, which was the top-rated pick out of 26 prepaid cards we rated in July.

3. Next, use your rewards credit card to buy a reload card. The Vanilla Card on the Vanilla Reload Network can be used in conjunction with the top-rated Bluebird. You can find the Vanilla at 7-11, drugstores such as CVS/Walgreens and dollar store chains. See a list of retailers selling them.

The Vanilla is the card of choice for this tactic because it only charges a $3.95 fee for every $500 you put on the card. By comparison, the Green Dot reload card charges $4.95. That initial fee may seem like a nuisance, but it’s more than made up for by the rewards you earn.

For instance, putting $1,000 on the Vanilla card will cost you $8. But, Brian Kelly, founder of thePointsGuy.com, a site offering advice on maximizing travel rewards, says $1,000 worth of Vanilla charges using the American Express Starwood Preferred Card, is equivalent to at least $25 in Starwood points. Those points can be used for airline tickets or hotel stays worldwide. And combined with the Starwood card’s lucrative 30,000 point sign-up offer you’ll earn even more.

4. Use the reload card to add money to your prepaid card, and spend it down. Since prepaid cards, such as the Bluebird, function like checking accounts, many offer free checks and online bill pay. The Bluebird’s online bill pay will even allow you to enter your landlord’s address, for instance, and have paper checks directly mailed to him.

5. Reload and start again from the beginning. There’s a $1,000 daily limit on using Vanilla card to fill Bluebird accounts, and a monthly limit of $5,000, per person. So a couple could, theoretically, charge $120,000 a year this way in total. If you have a large mortgage (or two), or a small business, then this tactic could earn you some huge benefits. To up your rewards, you can even pay off your rewards credit card bill with Bluebird.

But of course, there are inconveniences to this strategy, and similar to other rewards schemes that have come along over the years, this probably won’t last forever. Here are some caveats:

Your prepaid card has to be part of the Vanilla Reload Network. There are also Vanilla gift cards, which you can’t use to load money onto a prepaid card, so make sure you buy the right card.

Some individual branches of retailers won’t take credit cards to buy reload cards. To minimize money laundering or other criminal activity, some branches have instituted a policy of only accepting cash or debit cards when buying reload cards, says Kelly of thePointsGuy.com.

There could be cash advance charges. Citi credit cards may treat purchases of reload cards as cash advances, since they are considered “cash-equivalents’. And cash advances can be costly. For instance, the Citi Dividend Platinum Select card charges a 10% fee for cash advances, plus a 25% interest rate on advances that you carry over as a balance. While this isn’t a problem with the Vanilla-Bluebird combo, other configurations of prepaid spending run into this issue.

- Chris Fichera