The REDcard strategy: clever deal or money laundering?

“Wouldn’t it be nice,” you might think to yourself, “if I could pay my rent/mortgage with my credit card and get points for that, since it is my biggest bill.”  Well a reputable resource showed me a hipster glasses-adorned article about how to “Pay your mortgage with a credit card and meet minimum spends.

This REDcard …strategy… turns a credit card charge into cash.  In the article, Mr. Hipster Specs precipitously flies through a set of tedious and brain-twisting steps to accomplish this alchemy: you get a pre-paid Target card, load it up with funds from your credit card, yada yada yada, then use the Target card like cash.  Even at the ATM!

I gathered from the article that there are two main motivations for doing this:

A) To get lots of credit card points by paying for large purchases generally restricted from credit cards, if you’re into that.  Basic examples are mortgage, utilities, etc.  Or, if you have a big purchase, such as a bike or car.  You can load up a REDcard almost infinitely, with a monthly limit of $5,000.  So theoretically if you wanted to buy a $20,000 car, you could plan 4 months in advance, load up a REDcard $5K each month, and buy the car with the REDcard (which is higher than most CC limits and therefore off-limits generally).  And this way you get to collect $20,000 worth of credit card points for a purchase you would not normally charge, which would otherwise take well over a year just using a credit card for normal spending.

B) When you need to spend a lot on a credit card quickly, e.g., to meet a minimum expenditure (or “minimum spend”) requirement to get a sign-on bonus.  Some credit cards do have pretty unreasonable thresholds for the sign-on bonus (e.g., spend $2K in 3 months). This method solves the problem of “what would I spend $2K on in 3 months??” without you having to take a vacation just to get airline points.  By moving money through the credit card to a pre-paid card, you can collect points up front and spend at your convenience.

Here are my thoughts on this:

  1. This is the first legit credit card points scam I have heard of, since it does not require you to ruin your credit applying for 6 credit cards every year.  It seems feasible.  However…
  2. I don’t see how this is any different than a cash advance, which has the highest interest rates going in the whole SEC-regulated world of lending.  So I’m not sure why this is allowed… I am guessing the SEC or another regulatory agency will stop it before too long.
  3. What happens if this REDcard gets stolen?  I doubt it is FDIC-insured.  Given that it requires some amount of personal information for setup and can be used as a debit card, I assume it can also be electronically hacked.  I guess you could diversify against the risk by distributing laundered money across several cards if you are planning to load up a big balance.  But this seems to go even further into the quicksand.
  4. Yeah, I just said ‘laundered.’  As in money laundering.  Isn’t that what this is?  It may not be illegal but it does not seem normal…  The credit card companies may not care, and who knows what is in it for Target, but what about your bank?  Would you get flagged for depositing a strangely uniform amount of money each month not through ACH?

So… do people do this?  I have heard of “airline points scamming” generally, but not this specific method.  When it comes to scamming the system and sticking it to the Man, I prefer safety in numbers.

Also, it seems too good to be true, other than the legwork of setting up and maintaining this card.  But the reward in points definitely justifies the trouble and risk if you do it right.  So I do not understand why all people are not doing this, unless this is one of those “why doesn’t everyone make their own hummus because it’s so much more delicious” things.  In which case the answer is that most other people find this more tedious than I do, or are not aware of the option.

But the question for me is really whether it is worth it to me.  Because of the inherent risk of losing the card or it getting stolen or hacked, I would be unlikely to pool up large funds over time (as in the buying a car example).  It might be worth it to use it as a mortgage card and just load it up with the monthly value of my mortgage payment on the last day of each month, then withdraw the next day.  This would reduce loss risk and minimize the racket to a single but significant monthly transaction.  And I’d get a bunch of Jetblue points on my AmEx card.

But……at the end of the day, I am a minimalist.  I have been mulling over this idea for over a week and it still has not happened.  So let’s face it, it probably won’t!  Would you do it?

One thought on “The REDcard strategy: clever deal or money laundering?

  1. It’s over. As of May 6th, you can no longer load your Target pre-paid card with a credit card. It was great while it lasted. Went today to load my card. The message they got on the Target register is, “third party credit cards will not be accepted”. First time they had seen that error at Target. I found the quote, “Target has made the decision to stop accepting credit cards in order to align with all other merchants where prepaid cards may be reloaded” – probably because they had to pay too much for the interchange fees for credit card processing on these transactions.

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