When category bonuses trump fees

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Now that CVS has stopped allowing credit card purchases of reload cards, many have turned to buying Visa and MasterCard gift cards.  These gift cards are special because they are also debit cards.  They allow customers to set PINs to be used for certain transactions (see “Gift card PINs”).  One common approach is to use these cards to pay bills that can’t ordinarily be paid via credit card.  This can be done online with Evolve Money, or in person at stores that offer bill payment services and allow payment via debit card.  If all else fails, you may be able to find a store that will let you buy money orders with debit cards. 

The purpose of all of this, of course, is to earn credit card rewards.  By buying and liquidating gift cards, you can increase spend on your rewards earning credit card in order to meet minimum spend thresholds, achieve big-spend bonuses, or simply earn normal spend-based rewards.  Its very important to make sure that the fees involved in these transactions are significantly less than the value of the rewards earned.  Otherwise, you would have gone through a lot of work for nothing.

Cost Per Point

If one were to use a free service like Evolve Money to pay bills that couldn’t otherwise be paid by credit card, then the cost per point for buying and using gift cards can be determined by taking the number of points earned and dividing by the gift card purchase fees.  The number of points earned when buying gift cards depends on your card’s usual earning rate as well as any category bonuses (e.g. “5X office supplies”) or spend bonuses your card offers.  The following table shows a number of widely available gift card values and fees along with the cost per point assuming you pay with a card that earns 1, 2, 3, or 5 points per dollar:

Card Value Fee 1X Cents Per Point 2X Cents Per Point 3X Cents Per Point 5X Cents Per Point
$500 $5.95 1.18 0.59 0.39 0.24
$500 $4.95 0.98 0.49 0.33 0.20
$500 $2.95 0.59 0.29 0.20 0.12
$200 $6.95 3.36 1.68 1.12 0.67
$200 *$4.88 2.36 1.18 0.79 0.47
$100 $5.95 5.62 2.81 1.87 1.12
$100 **$0.53 0.50 0.25 0.17 0.10

The cells shaded green, above, show situations where you would be buying points for less than half a cent each.  The yellow cells represent buying points between half a cent and 1 cent each.  And, the red cells represent costs above 1 cent per point.  Two of the fees listed above require explanation:

* $4.88 for $200 gift card: This fee assumes the purchaser uses a Visa business card enrolled in the Visa Savings Edge program at Staples in order to get 1% back.  The in-store fee is $6.95, but after the $2.07 rebate, the total fee comes to $4.88.

** $0.53 for $100 gift card: This fee assumes the purchaser goes through a 5% cash back portal to Staples.com, buys at least two $100 Visa gift cards (each with a $6.95 fee), and pays with a Visa business card enrolled in the Visa Savings Edge program. 

No Fee options

Sometimes it is possible to find gift cards available with no fee whatsoever.  This makes it theoretically possible to buy credit card rewards for free.  Obviously that’s a better deal than paying even 1/10th of a cent per point.  Right?  Not so fast…

When fees trump free

Some rewards programs allow you to convert points directly to cash either as a check or as a statement credit.  The best example I can think of is Chase’s Ultimate Rewards program.  If you’re not interested in using your points for more lucrative travel options, you can always redeem points for cash at a rate of 1 cent per point.  So, if you earn points when buying gift cards, you can opt to use those points to pay yourself back for the gift card fees.  While that may not be the best use of your points, it illustrates a situation where paying fees can trump buying fee-free gift cards.  Specifically, this will be true when you can earn significantly more rewards for the gift card with the fee.  For example, perhaps you can get a fee free gift card at a store where you earn only 1 point per dollar, but you can get 5 points per dollar at a store with a fee.  With the latter option, by using points to pay back the fee, you can still earn points for free, but you may earn many more points.

The following table shows the points earned per dollar after paying yourself back for gift card fees at a rate of 1 cent per point.  This table only makes sense with rewards programs where points are truly worth 1 cent (or more) each.  The cells show the number of points per dollar earned by each method after subtracting out the points used to pay for the fees.  For example, if you use a 5X earning card (such as a Chase Ink card) to buy multiple $100 Visa gift cards at Staples.com (after enrolling in Visa Savings Edge and going through a 5% cash back portal), you’ll earn 5X points based on the initial $106.95 per card fee, but after using points to pay back the final $0.53 per card fee, you’ll still profit by 482 points per $100 card, which is equivalent to 4.82 points per dollar.

Card Value Fee Orig 1X Orig 2X Orig 3X Orig 5X
$500 $5.95 (0.18) 0.83 1.85 3.87
$500 $4.95 0.02 1.03 2.04 4.06
$500 $2.95 0.42 1.42 2.43 4.44
$200 $6.95 (2.44) (1.41) (0.37) 1.70
$200 $4.88 (1.41) (0.37) 0.66 2.73
$100 $5.95 (4.89) (3.83) (2.77) (0.65)
$100 $0.53 0.54 1.61 2.68 4.82

Take a look at the “Orig 5X” column.  The values in that column represent the points per dollar earned after buying gift cards with a 5X earning card and using points to reimburse yourself for the fees.  In all cases, but one, you’ll earn more than 1 point per dollar after paying yourself back for the card fee.  And, in all cases but two, you’ll earn more than 2 points per dollar.  This means that earning 5X valuable points (such as Ultimate Rewards) is usually better than earning 1X or even 2X fee-free points.  In fact, you can do better even than 4X fee free points with three out of the seven examples above!

Before you ask, no I don’t know of any places (anymore) where you can get 5X Ultimate Rewards points per dollar when buying $500 Visa gift cards.  Occasionally, the Chase Freedom card offers a 5X category bonus at gas stations, though, so that is sometimes a possibility if you have a friendly gift card selling gas station nearby.  Another option, of course, is to find other cards that offer 5X at useful stores (see “Playing 5X everywhere Whack a Mole”).  With Chase Ink cards, the best current options are to buy $200 gift cards at Staples in-store, or $100 gift cards online (see “Staples Rocks”).

Wrap up

While its always a good idea to avoid fees, its often worth paying fees if it means earning significantly more rewards.  You do need to consider the value of your time as well, though.  The table above shows that buying $100 Visa gift cards online may be the best option of all for earning points, but its also the worst option of all with regards to convenience.  Unlike cards bought in-store, cards sent by mail have to be activated one by one (using activation codes that are sent separately).  And, then, you’ll have to do twice as much work to liquidate these cards compared to $200 cards, or five times the work compared to $500 cards.  For example, I recently used 17 $100 Visa gift cards to make a mortgage payment through Evolve Money (I had to use multiple accounts due to Evolve’s $1000 per day limit).  After painstakingly activating each card, I then made the payments. For each payment I had to enter in my name, address, and card number, and then I had to wait 5 minutes before doing the next one to avoid receiving a “duplicate payment” error.  This was a lot of work!  To me, it was worth it to get 5X rewards and to help meet the minimum spend requirement on my wife’s new Ink card, but I expect that many others will have a lower tolerance for this.  It’s perfectly fine to earn fewer rewards in exchange for less hassle!

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