Using gift cards to amass rewards points

Dear Cashing In,

I heard a story today from a lady who said that she uses her credit card to purchase gift cards, which she uses to pay her monthly bills such as utilities, house and car payments, gasoline, etc. She went on to say that by paying her bills in that fashion, she was able to rack up points just by paying her bills via those prepaid gift cards. It seemed too good to be true, but I can’t find any information on whether or not that is true. Is it?  – Ron

Dear Ron,

There are a lot of reasons to dabble in points and miles: You can earn free flights and hotel stays and make your vacations easier with perks. You can earn cash back with your charges. You can buy merchandise without spending any actual money.

Oh, and there’s this: You can tell people how wise you are for being able to do all this on the cheap. It’s nice to be able to tell people about that “free” trip you took on credit card points. Sometimes sharing that information springs from the genuine desire to spread the good word, but often it comes out of pride in one’s points savvy.

And, people being people, we are prone to exaggeration. Those “free” trips aren’t really free, of course, because you probably paid an annual fee or minimal airport or security charges, in addition to all the spending you did on your card to earn the points for the “free” trip.

My hunch is that this sort of exaggeration is what is at work here. It is true that buying prepaid cards can be a helpful strategy in amassing points and miles. However, it is not true that prepaid cards are some sort of magic elixir that easily covers every conceivable charge while you rack up tons of points or miles.

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See related: Build extra reward points with gift cards

When buying prepaid cards makes sense

There are two major considerations when using a prepaid card strategy that make sense. First, it works only for expenses in which the vendor accepts credit cards. Think about where your money goes each month and how you can pay those expenses. Of course, you usually can pay gas at gas stations using credit cards, but when it comes to other monthly payments, such car payments, house payments, utility bills or even credit card bills, it can be tricky.

There are some companies that allow you to pay them with a credit card, then they make the house payment or car payment, but those companies typically charge a fee. In the case of Plastiq or Official Payments, the fee can range between 1.9% and 2.5% of each transaction. If you use other online services such as Venmo or Radpad, the fee can be as high as around 3% – which usually negates any advantage of paying with a card.

See related: Paying rent with a credit card

Second, buying a prepaid card for points makes sense only if you are reaping a category bonus on the purchase of that card. For example, say you have the Blue Cash Preferred® Card from American Express. It gives you 6% cash back at U.S. supermarkets (up to $6,000 annual spend, then 1% thereafter) and on select U.S. streaming services, 3% back at U.S. gas stations and on transit purchases and 1% on all other purchases.

It would make sense, for example, to buy $100 in prepaid Shell gas cards at the supermarket. That would earn you $6. You then use the prepaid card to pump $100 worth of Shell gas. Doing it that way makes you wind up better than if you just used the American Express card at the Shell station because that would earn you only $3.

The part that becomes tricky is finding stores that allow you to buy prepaid cards on credit. Many grocery stores have cracked down on purchases of gift cards with credit cards to reduce fraud, especially with prepaid cards that are not company-specific, such as general Visa gift cards.

Buying prepaid gift cards for points can take a lot of effort, and it can be a sensible strategy to earn points and miles. But it might not be as easy or lucrative as your friend has led you to believe.