Can You Live Off Credit Card Rewards?
An Interview With Someone Who Tried
Like many air travelers, I tune out the mid-air sales pitches for frequent flyer rewards credit cards. And though invariably a couple people always raise their hands to get an application from the flight attendant, I usually figure them to be credit card junkies, not savvy frequent flyer mile gurus jetting around the world for free. But last summer when I traveled frequently to visit family overseas, I paid more attention to the pitches. 50,000 free miles just for opening a new credit card? Could it really be so easy to get super cheap or even free airfare?
When I researched it more, I discovered a subculture of people immersed in the hobby of "churning" credit cards solely for the rewards, often holding more than 25 active cards at a time, many claiming to make a living off the rewards. To learn more about amassing credit card rewards as a lifestyle, I interviewed my friend Carlson, from Virginia, who is the only functioning adult I know who carries a dozen credit cards and makes money from their rewards programs.
Me: How many active credit card accounts do you have open now, and what was the most you ever had at once?
Carlson: These days I only have nine, and only one of them is an airline miles card. The rest have various cash back rewards. Nine may seem like a lot to normal people, but when I was an active churner I might have had up to 30 at once. It was the sign up bonuses. Back in the heyday you jumped on any deal with a great sign up bonus, bought a pack of gum, paid off the balance, closed the card, and kept the bounty. These days it's not so easy because credit card companies know all the tricks.
Me: Why did you become a credit card rewards collector?
Carlson: The big thing when I started collecting rewards was frequent flyer miles, which today they call "points." This was a huge boon for people like me who traveled a lot for work and could expense everything back to the company. First you use your card to buy food, lodging, and airfare to get miles/points for spending all that money. Then your company reimburses you for all the expenses, so the miles are free. Finally, one day you have enough miles accrued to pay for round trip air fair for your next business trip, so you buy the tickets with your miles, and your company still reimburses you for the regular price anyway. You're using your job to to make free money on the side.
Me: You say chasing credit card rewards is not nearly so easy today as it was when card issuers first starting offering these perks to get more customers. Can you explain?
Carlson: The big perks used to be sign up bonuses in the form of cash back or miles, no purchase minimums, and no annual fees. It was a good hobby to get into because not a lot of people were doing it so the credit card companies could afford to be generous, and nobody cared as much about credit reports. Nowadays the "elite" rewards cards have annual fees that take a big bite out of the free money they entice you with and they have really high minimum spending floors. You might have to make $3000 in purchases within 3 months to get the rewards. If you're not one of the crafty people who knows how to game the system, you're just going to buy a lot of junk you don't need to get rewards that don't make up for all the money you waste. And of course these days churning credit cards will kill your credit score. It's not a good hobby to take up if you plan to buy a house any time soon.
Also, your employer might insist that you use the company credit card to make major purchases, so they get the rewards and not you.
Me: Can you explain ways that people game the system to accrue rewards without having to waste money buying junk they don't need?
Carlson: On the credit card forums I used to frequent, a lot of people talked about ways to basically buy money with with cards. The US mint, for instance, had a deal to buy one dollar coins at face value with free shipping. Well you can imagine who jumped all over that deal: coin collectors and credit card rewards collectors. People were buying thousands of coins with their 3% rewards cards, depositing the money in the bank and getting hundreds of dollars for free.
Me: Even if you bought $10,000 worth of coins, you'd only get $300 back with a 3% cash back card. That doesn't seem worth the hassle to me.
Carlson: It's not worth the hassle. I've come to discover that many of these people are crazy and like collecting the rewards for their own sake, but not in a way that makes financial sense.
But there's another way to game the system that isn't so crazy and that's to buy gift cards with your credit card. Especially with store-branded credit cards. You can essentially pre-pay all your purchases at a particular store for a year if you by $1000 worth of gift cards there. And in return you'll get 2% to 5% cash back.
People also find clever ways to pay with their credit card indirectly. Say you employ a maid and a gardener who will only take cash or check. But if you can convince them to accept grocery store gift cards once in a while...
The main way to accrue rewards quickly is to always use a credit card for every single purchase when possible. Pay your insurance with credit, that's a big expense. Pay your rent with credit if the landlord doesn't charge you a fee to do so (most do, unfortunately). And always use a card that gives the highest cash back percent for that particular purchase. Over time the rewards will build up.
Damaging Your Credit Report
Me: You mentioned that opening and closing a bunch of cards to accumulate money from sign up bonuses would kill your credit score. What about keeping all the cards open?
Carlson: You really do have to keep all these rewards cards open if you ever plan to take out a bank loan in the future. But keeping open a couple dozen credit cards has a lot of drawbacks which is why I discourage people from getting too deep into this hobby.
(1) Having lots of credit cards is bad for your credit score. Not as bad as opening and closing accounts all the time, but not as good as keeping five or fewer. I don't recommend anyone have more than six.
(2) You have to use all the cards once in a while to keep the accounts active, or else the card issuer will close your account for inactivity, which is a ding on your credit report. You have to be very organized. Most people in this hobby keep lots spreadsheets to track their card usage.
(3) Low credit utilization is good for your score. Meaning, if you only use between 10% and 30% of your available credit your scores will stay high. What cautious hobbyists do is divide a purchase among half a dozen cards to keep the credit utilization low on all of them. It's a very annoying way to live. But, the less you spend the less cashback you get, so the less cautious hobbyists max out their cards out as often as possible to get more cash back and miles.
(4) You have to avoid getting interest and late fees no matter what, so you should only use them when you could just as easily use a debit card. Now that you can pay your bills online, it's just a few clicks to pay off the charges with your checking account as soon as they post to your credit card account. This is not a hobby for people who don't have a steady source of income. The interest fees always outweigh the rewards.
Me: In the US, every time you apply for a credit card or loan it generates a "hard inquiry" that lowers your score. How do you mitigate this?
Carlson: You can't really. The best thing to do is to apply for several cards at once, because separate inquiries in a short time frame are treated like a single inquiry. Fortunately the inquiries only ding you a few points and you will recover through responsible credit usage in six months or so. Don't get into this lifestyle if you are trying to buy a house or new car!
Airline Miles vs. Cash Back
Me: You used to accumulate tons of airline miles on tons of cards, now you favor getting cash back rewards. Which is better? Miles, cash back, or some combination of both?
Carlson: This really depends on what you like to do. If traveling is an integral part of your life and you would do it even if you paid full price for tickets, then get a couple of airlines miles cards. A lot of them have hotel perks too. You have to put up with black out dates and being restricted to only certain airlines.
If you traveling isn't that important to you, get the cash back cards. Get the cards offered by the three stores you shop at most often and few more for things like gas and restaurants. Every time you purchase something, use the card that will give you the most cash back for that type of purchase. Nowadays because there is so much competition among the card issuers, you can deposit the cash back directly into your checking account as soon as it posts, and some of them even have cash back matching sign up bonuses. It's the best way to get free money for doing nothing.
Most importantly, shop around for the cards with the lowest annual fees, or no annual fee. Frequent flyer miles are more valuable, so those cards often have an annual fee that you can't avoid. But most cash back cards do not have an annual fee. Do the math to see if the annual fee is significantly less than the reward. For instance, if the fee is $35 a year (a typical number) and you get an average of 2.5% cash back, then you need to charge at least $1400 worth of expenses to avoid losing money. Credit card companies profit from people's aversion to math.
Making a Living Off Credit Card Rewards
Me: Many credit card rewards gurus claim they make a living off the rewards? How is that possible?
Carlson: It's a half-truth. The rewards gurus don't make a living directly from the cash back and airline miles they accumulate, most make a living from their credit card guru blogs. They earn affiliate marketing commissions when their readers sign up for credit cards through the links on their blogs and they are paid by others to write about earning frequent flyer miles and points. That's why you'll never see a bad review of a credit card on their blogs!
Then there are others who make a living selling books and seminars to teach other people how to make money with rewards. It's a bit of a pyramid scheme. Even when I was traveling a lot for work and cashing in my airline miles through company reimbursement, I wasn't making more than $2000 a year through necessary purchases. And now that I don't travel as much, I get back less $1000 a year in cash back. I don't use the gift card trick to game the system. The biggest purchases I make with my credit cards now are my car insurance payments.
Me: What about people who claim to make frequent all-expenses-paid trips to Europe with nothing but credit card points?
Carlson: It takes a long time to build up enough points to do that, years. If you want to take a free trip to Bali in a few years with your partner, and you can pay all of your daily expenses and big bills with credit cards in the mean time, then get the airline miles cards and start racking up points and planning. Use the gift card trick to buy money. But again, the bloggers who claim to be doing this all the time are not financing their trips through points alone, they are making most of their income through paid endorsements and writing columns about frequent flyer miles. A non-blogger can't live in airports and hotels for a living.