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Suppose that a consumer has access to a credit card having the following properties:

  • The credit card agreement includes a "cash back" rewards program. The consumer receives 1% cash back with every purchase.
  • Additionally, the credit card company does not charge any interest on credit-card-loan so long as as the consumer pays their full balance each month. Interest is charged if the consumer fails to pay the full balance.

What prevents people from buying things, selling those things, and re-buying, in a kind of endless loop?

For example, suppose that:

  1. The consumer uses a credit card to buy $1,000 worth of gold bars.
  2. The credit card company then pays the consumer $10 as part of the 1% cash back program.
  3. The consumer then sells the gold bars for $1,000.
  4. The consumer pays the full-balance owed to the credit card company.
  5. The consumer first lost $1,000, then gained $1,000, but received a $10 profit as part of the 1% cash back program.
  6. The consumer repeats this process until they earn a nice annual salary built entirely from 1% cash back rewards.
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  • 56
    I'd kindly ask - Do you really think you can sell gold for the same amount you paid for it? Even stocks, with no commission, have a bid/ask spread.
    – JTP - Apologise to Monica ♦
    Aug 16, 2020 at 1:00
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    Also, I know you didn't propose this, but I do want to point out that returning an item generally also negates the cash back. Stopping the "buy-return" version of this sequence is one of the reasons returns are most often back on the original form of payment, rather than in cash.
    – Bobson
    Aug 16, 2020 at 1:16
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    Your idea, as proposed won't work- see answers why. But every once in a while, they do. Here's one, though it's capped: money.stackexchange.com/q/127891/17718
    – TTT
    Aug 16, 2020 at 4:12
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    Your 1% cash back is funded, in part, by the fees that the seller has to pay for accepting your card. Merchants accept credit cards because it's bad for business to refuse them, but also because they can include the fee as part of their markup, effectively passing that cost back to the consumer. You can't expect to pay $1000 for goods worth $1000.
    – chepner
    Aug 16, 2020 at 14:25
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    “Manufactured spending” is the name for the suggested activity.
    – Spencer Joplin
    Aug 16, 2020 at 18:25

14 Answers 14

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There was a time where what you are proposing did work.

This is how it was done:

  • Go to the US Mint webpage.
  • Order multiple rolls of US $1 coins with a credit card. There are 25 coins in roll.
  • The US Mint didn't charge a credit card fee.
  • The US Mint didn't charge for shipping.
  • When the coins arrive take them to your local bank and deposit them into your account before the credit card bill is due.
  • Lather, rinse, repeat.

It worked because there were no fees. there was zero shipping cost, and the new buyer always paid the same price as the original seller would sell the item for. The credit card companies didn't treat the transaction as a cash advance, so it avoided those fees and the instantaneous trigger of interest charges.

Over time the US mint changed their policies, and so did the credit card companies. This no longer works. Although with the right conditions, the COVID coin shortage, there might be an opportunity for the window to open again.

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    @JTP-ApologisetoMonica There were rumors of people ordering pallets' worth.
    – stannius
    Aug 16, 2020 at 21:18
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    @mhoran_psprep Note that the key to this scheme is that there is a loser, the Mint. The credit card co takes 3% fees and gives 1% (sometimes more) cash back. The consumer churns coins for a small % back. The mint goes in knowing they are going to pay 3% subsidizing coin distribution, but failing to achieve their distribution goal because of the churners.
    – stannius
    Aug 16, 2020 at 21:21
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    My lower back hurts just reading that comment, stannius. It doesn't sound pleasant.
    – JTP - Apologise to Monica ♦
    Aug 16, 2020 at 21:23
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    @Fattie That's not the case for personal bank accounts in the United States.
    – chrylis -cautiouslyoptimistic-
    Aug 17, 2020 at 13:35
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    @Fattie In that case you're paying for the counting service, not the deposit. Bring your coins in already in rolls and I doubt they would charge you anything (though of course I can't say for certain, not knowing what bank you use).
    – nasch
    Aug 17, 2020 at 16:00
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In addition to the already listed points, when you buy something on your credit card, the shop pays a fee between 3 and 4.8% (depending on the exact credit card type and brand.
That means if you buy gold for 1000 dollar, it's not worth 1000 dollar, or the shop would already make a 3+% loss by selling it to you. Therefore, nobody will give you 1000 dollar for it (unless he is stupid, and yes, you can make money from stupid people, but you don't need a 1% cashback card for that).

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    This. And, if they do buy it from you, they will want to use their CC so they can get the 1-2% cash back also, but it will cost you 3% in CC merchant fees. If you don't accept CC then they'll just go buy the gold for the same price from someone else who does (like where you bought it).
    – TTT
    Aug 16, 2020 at 4:10
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    It's higher than shops think it is, but it,s not that high. Heck, PayPal Here charges 2.7% on penny-ante transactions for small casual chargers. But yes, any online sale of gold has the cost of credit cards and shipping built into it.
    – Harper - Reinstate Monica
    Aug 16, 2020 at 15:07
  • “...unless he is stupid...” or error-prone, which inevitably happens.
    – Spencer Joplin
    Aug 16, 2020 at 18:30
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There's no free lunch. The seller would price to cover this.

Your (well, any) transaction (but especially, Amazon Prime shipping) has a number of costs for the seller.

  • The credit card merchant fees ranging from 2-5% depending on their agreement
  • The inherent risk of chargebacks, CC fraud, "did not receive" claims, etc.
  • Shipping
  • Inventory carrying costs (costs of that money being tied up)
  • Facility costs
  • Staff, payroll, benefits, yada yada
  • various and sundry other business expenses

All of these come out of your end. They are built into the price you pay.

Another way of saying that is you are paying more than the seller's bare cost-of-goods-sold, to cover all the above costs of doing business.

With so much burden on the transaction, obviously, there is no way to buy a fungible for its resale value.

And these costs bite you as well. You find the Craigslist buyer who cheerfully agrees to your price so you'll make your 1% margin... and then, the buyer sends you PayPal funds. Which cost you 3% in PayPal fees. And the buyer is like "well, what's the problem with that!? It's a normal cost of doing business!"

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    You could cut out the middle-man, and set up your own company with an online store, and buy products from 'yourself inc.' to gain the cashback on the credit card. Again you'll pay more in merchant fees (and corporation tax) than you'll get in cashback.
    – JeffUK
    Aug 17, 2020 at 12:17
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This scheme could potentially work as you describe, provided that the person buying gold on a credit card has someone else whom they can sell the gold to at the price which they could have bought it themselves.

Consider this: If I can walk into (say) a jewelry store and buy a lump of gold for $1000, why should anyone else buy that lump of gold for $1000, when they can also walk into the store and buy it themselves? So I need to either sell my lump for less, which eats into the profit from the 1% cash back (and if I sell for less than $990, I lose money), or I need to provide something else that makes it worth buying from me than my source, such as convenience. But odds are good that the cost to me to provide that convenience is going to outweigh the 1% profit margin that I'm starting from. That may come in the form of transportation costs (how far can you get on $10 of gas?) or time (what else could you do to earn $10 in that time?).

This also assumes that anyone is going to let you buy a notable quantity of gold on a credit card, which is a risky-for-merchant method of payment, and that the credit card company won't think that someone is committing fraud (or just a broken computer system) and shut down the card after seeing the same payment amount from the same high-value merchant repeatedly in a short time frame. Either one of which would also negate the plan.

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For one thing, most credit cards have an annual cap on cash back. Also, seems like a lot of work and not guaranteed you can get the same amount back for 2nd hand goods that you purchased new.

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    I'm not sure if "most" is true. None of my cash back cards have an annual cap. My favorite is the Citi Double cash which is effectively 2% cash back with no limit. I agree with your second sentence though.
    – TTT
    Aug 16, 2020 at 4:14
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The fundamental point you're overlooking here is that most merchants expect to cover their costs (which includes those credit card fees) AND make a profit on the goods they sell. That makes it pretty unlikely* that you are going to be able to sell whatever you bought for as much as you paid for it. The price difference is likely to be a lot more than the 1% cash back you're getting.

With your gold example, the problem is compounded because the price fluctuates quite a bit, and on a daily basis. If you'd bought a bunch of gold on August 6th. when the price was around $2068/oz, and sold it yesterday, the price would have been about $100/oz less, which more than wipes out your cashback profit: https://www.usagold.com/gold-price-live.html?tvwidgetsymbol=TVC:GOLD Of course you can hold on to it, hoping for a price increase, but then you're just a speculator.

*Of course you can find such opportunities, if you work at it, but then you're just another trader.

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  • Fluctuations don't change the fact that the expected value is greater than the price paid.
    – Acccumulation
    Sep 25, 2020 at 22:06
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There's a (for lack of a better term) hobby that some people get into called "churning" where they sign up for new credit cards frequently. The credit cards they sign up for have pretty lucrative sign up bonuses. One of the more popular cards offers to give you $600 for signing up for it so long as you spend $4000 on it in your first 3 months. There are websites dedicated to this where new card offers are discussed, ways to optimize issuing back rules, strategies to "spend" money without really spending it. They have a lingo with terms such as "manufactured spending" which is the process by which they, similar to your gold bars example, spend money without really spending it.

To get back to your actual question, the thing that stops people from doing this, as others have alluded to, are risk and the value of one's own time. The main risk, I would think, is that you end up buying things you don't actually want in pursuit of the bonus but can't quite get to the threshold and end up with nothing but debt you can't afford. Another risk is that if you're constantly applying for new cards, your credit score will get worse and if you need to get a mortgage soon, it may cost you some points there. The other thing is the value of your time. If you naturally spend $4k every 3 months then this wouldn't be a hurdle but if you're jumping through hoops to "manufacture" $4k worth of spending then that will cost you your time, as will tracking your progress with the spending.

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I had my own moment of doing this.

Local bank offered a credit card with 10% (!) cash back, for gas, supermarket, drug store.

CVS offered 'gift' cards, i.e. a Visa debit card, loaded with $500. For a cost of $4.95.

This would reduce the gain to 9%.

I first bought 2 cards and verified the 10% was credited, that somehow the gift card purchase wasn't a prohibited item.

The punchline - over the remaining time the deal was valid, I bought a total of $50,000 worth of cards. CVS limited purchases to $2,000, so it just took regular visits on the way home.

After about $20,000 in purchases, the bank dropped the offer from their website. I shared this on line soon after, to mixed comments. The negative ones ranged from the cliche "you can't get rich on credit card offers" (No, but the average person in the US would have trouble if they got a $1000 bill to repair their car), "You're [gaming the system] why we can't have nice things.' (guilty as charged) and last, "That was very risky, it was like walking around with $50,000 in cash." (I never had more than $2000 on me, and the cards were used up in less than a year, regular spending. And my real estate tax bill that took the debit for a 50 cent fee.)

In the end, the process you propose wouldn't work, not as you spell it out, but there are other methods to profit from card churning, as long as you are willing to put in the time and are careful to monitor your credit report. I kept the card I mention here, and use it as a backup card, should my main one get locked. But, most often, the churners are signing up for deals and cancelling the card by the end of the year.

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    There's some risk to this. Many banks treat such purchases as cash advances. You can't completely rely on a test purchase to detect this; I would not be surprised if some banks will provide a grace threshold to avoid penalizing consumers who buy debit cards to give out as gifts. Also, buying a high volume of gift or debit cards tends to set of alerts in your account (because stolen cards are often used to buy gift cards).
    – Brian
    Aug 17, 2020 at 18:34
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    I was walking with a friend, an economist, and he literally stepped right over a $100 bill lying on the ground. I said something like "Hey, you just walked over that hundred dollar bill" as I turned around to pick it up. He replied, "If there were really a hundred dollar bill on the ground, someone would have picked it up already." Yes, I appreciate all that could have gone wrong. But this was a long time ago, and it all went well.
    – JTP - Apologise to Monica ♦
    Aug 17, 2020 at 21:18
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    @JTP-ApologisetoMonica Your little story about an economist who passed up a $100 bill lying on the ground perfectly epitomizes part of what I do not like about economics. Most economists are so wrapped up in their theoretical models of the world that they don't let reality get in their way.
    – Michael Butler
    Aug 19, 2020 at 20:23
  • @SamuelMuldoon - agreed! Economists many decades ago proposed “trickle down economics“. In hindsight it was a proven failure. But the last change to the tax code had economists who still believed in it. Economists also like to say that when you raise the price of some thing you get less of it. So raise the minimum-wage and jobs will be lost. This also has been proven incorrect. Too much is wrong with economists’ theories. We should know better by now.
    – JTP - Apologise to Monica ♦
    Aug 19, 2020 at 20:42
  • Can you give an example of an economist who proposed trickle down economics?
    – Acccumulation
    Sep 25, 2020 at 22:05
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What prevents people from buying things, selling those things, and re-buying, in a kind of endless loop?

Two things. The very low cash-back rate, and the difficulty of recovering every dollar by trying to peddle something online.

You can't ship, because that's costly and would eat up your profit, and then some, so you require local buyers. You're trying to skim the credit card system, so your own customers cannot pay by credit card.

You basically have to meet locals in a parking lot and get cash.

People paying cash for something supposedly brand new and still in the box and with an original receipt are still taking a gamble, and will expect a discount.

Why would someone in your area pay you the $199.99 plus taxes for something you recently bought in a store in the same area? They can go to that same store and pay exactly the $199.99 plus taxes that you are asking, without handing some stranger cash in a parking lot. They can then earn the rewards on their own credit card, and benefit from whatever protection the credit card gives them. They have a receipt that points to their credit card; if they have to return the item, they can be reimbursed to the original credit card.

This scheme could only conceivably work if you continuously find items which are subject to short term sales at a hefty discount.

The cash back rewards are typically low. For all the hassle trying recover every penny that was spent on the $200 item, you will earn at most around two dollars in rewards. To earn a useful number of dollars per hour, you'd have to make this an extremely busy and stressful full time job. You'd have to move more items, and more expensive items.

If you had that much talent for moving retail goods, why wouldn't you just open a store: buy wholesale, mark up, and sell retail?

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I've just found myself in a situation where I could do this.

I have two cashback cards that are "stacked" meaning that one charges the other and I collect cashback twice. I get 8% cashback between them on every transaction.

Usually, cashback cards aren't accepted for making "deposits" into PayPay or investment brokerage accounts. However, I've realised that I can buy Mastercard gift cards and use them to make deposits.

If I were to then withdraw that deposit, I can repeat the cycle.

I've tested this with £50 and sure enough, I'm £4 richer. But I probably won't continue because:

  1. I'm not 100% sure it would be legal since buying a pre-loaded Mastercard may be seen differently from buying a gold bar then liquidating it (although more similar to the $1 coin example); and
  2. I don't want to get banned from my cashback cards because I already save a small fortune getting 8% cashback on all my purchases.
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This is functionally similar to a Cash and Carry investment strategy: https://www.investopedia.com/terms/c/cashandcarrytransaction.asp

As others have pointed out, this wouldn't work in short time horizons because others would seek to use the same strategy, minimizing any return.

By contrast, imagine you bought a gold bar today and sold the future of the gold bar for more (with pricing in contango) Then you would have a guaranteed return on the asset over time. The risk is in the carrying and holding of the asset, and there is meaningful opportunity cost for losing your liquidity during the carry window. Even so, legitimate businesses and return streams exist with cash and carry strategies.

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  • There's also a pretty high risk that the price of gold will drop significantly after you buy, For instance, if you'd bought at the high in late 2011 (a bit over $1900), you wouldn't have been able to sell at the same price until this summer.
    – jamesqf
    Aug 16, 2020 at 23:51
  • Not so if you're short the future. You'd buy the spot and short the future. If the future were cheaper than the spot (backwardation) then you would not make the trade.
    – Matthew
    Aug 17, 2020 at 0:19
  • But if you short the future, and the price goes up? Same situation.
    – jamesqf
    Aug 17, 2020 at 16:30
  • It doesn't matter because you own the physical spot, so you can make delivery on your future. If the future price goes up then you "made less than you otherwise might have". If own the gold bar because I bought it at spot, then I sell the future... The price action doesn't matter to the return because I own the good and have already contracted to sell it. This is, in fact, how many commodity producers do business.
    – Matthew
    Aug 17, 2020 at 19:14
  • @jamesqf You said that the price of gold in the year 2011 was roughly $1,900. Is that $1,900 per ounce, per kilogram, per what exactly?
    – Michael Butler
    Aug 19, 2020 at 20:31
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Yes, this does work, it's called "manufactured spending" - google the term and you'll find lots of info. It's a bit of a cat and mouse game though, and people like to keep the best tricks a secret to avoid such loopholes from being closed. I personally know someone who claims to be doing this for a living.

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A slight twist, but:

Business expense claims

For a while, the company I worked for (small business) didn't have corporate credit cards because the employees took a vote and we unanimously preferred to use our own cards and get reimbursed by the company.

That meant, if I had to pay for a $1000 business trip I'd put it on my card, get $10 cash back, then get reimbursed $1000 by the company and pay my credit card bill. The business had a habit of paying us very quickly after we submitted the claim so we never had to pay interest on the charges. It was a good system for the size of our organization.

I suppose, if you were in a position at a company where you had to pay large sums of money on its behalf and they allowed you to use your own personal card and get reimbursed you could make some good money from the cash back on your card. But it has to be noted that that's not a common situation.

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You didn’t take many circumstances like inflation, the price for used items (even if you haven't manipulated with them anyhow, the second-hand status lowers the cost), and the market’s feature. Moreover, I agree with other commentators. You pay more than 1000 in truth, and no one will give you the same sum.

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