The Hidden Costs of Prepaid Cards

This is my Vanilla Flower. It's expensive!

This is my Vanilla Flower. It’s expensive!

Generating miles/points via the use of prepaid cards is all the rage right now, and rightly so. They can greatly reduce the cost of your travels and, when used in conjunction with credit card bonuses, can allow you to travel in relative luxury or earn you elite status for ultra-cheap prices. But prepaid cards and other schemes do not allow you to travel for free, which I think is a mistake that many beginners make when getting started in the points world.

Products like Bluebird and the Amex, Target, and Wells Fargo prepaid cards all have costs in earning earn points/miles. Essentially, you buy reload cards with a credit card and then cash them out to pay your credit card bill. It’s a cycle in which very little money is supposedly lost and points are magically created. This works pretty well for a lot of people, and if you have a lot of cash and time on your hands you can literally earn millions of points every year without signing up for a single credit card.

But at what cost?

The Hidden Costs of Prepaid Cards

Let’s go through some of the more common methods of earning points to see what our cost and points/mile haul will be.

Bluebird has a $5K monthly limit on Vanilla Reload loads. The Amex Prepaid card takes $2.5K per month, and you can have three of them (so $7.5K total per month). The Wells Fargo card can be loaded with $2.5K as well. Amazon payments takes $1K. There are about a dozen other options to earn points, but I’ll stop there so we can count how much we’re looking at on a monthly basis. You’re up to $16K in month if you max out the four methods I just mentioned.

That’s already a minimum of 16K points. If you were earning the consensus most valuable points, SPG points, then those 16K SPG points would be worth roughly $400 if valued at 2.5 cents a piece. But let’s consider the fees. If you’re loading Bluebird and all your Amex Prepaid cards with Vanilla Reloads, then you’d need to buy 25 of them to reach the load limits (10 for Bluebird and 15 for three Amex prepaids). At $3.95 each, that’s a cost of $98.75. Let’s assume the Wells Fargo prepaid card and Amazon payments amounts can be withdrawn completely free (which they can, depending on how you do it).

We know that Bluebird is awesome since we can literally just pay off our credit cards with it; you incur no additional costs. The problem we run in to is with the other prepaid card products. While the Amex prepaid cards allow one ATM withdrawal free per month, the rest cost $2. Then you have to worry about the surcharge at the ATM you’re using to pull money out. Let’s say you use a Costco one that charges $1.25, which is generally one of the cheapest options. If you were to withdraw all $2.5K from each card, you’d need to go to the ATM 6 times since you can only withdraw $400 at a time (I’ll assume you spend the last $100 on normal spend).

How much it would cost to withdraw $2,500 at a Costco ATM.

How much it would cost to withdraw $2,500 at a Costco ATM.

The first time you’ll be charged only the $1.25 by the ATM. Trips 2-6 will cost $3.25 each ($2 from Amex and $1.25 from the ATM) for a total of $17.50. That is the cost for cashing out one card, but remember you have 3 cards…so the combined cost to withdraw is $52.50 to get back all your money.

Let’s see what our total costs are. We spent $98.75 on Vanilla Reloads and $52.50 to cash out our Amex Prepaid cards, so we’ve spent $151.25. I’m guessing that’s more than you thought you’d be spending. If you value SPG points at 2.5 cents apiece, those 16K points would be worth $400. But that $400 is now actually $248.75 when you account for costs, which is considerably less but still a “profit” of value.

Don’t forget to factor in all the time and gas as well. First you have to find 25 Vanilla Reloads, which for many people isn’t so easy anymore. Since there’s a $1K transaction limit you’ll have to go back to the store 13 times or go to 13 different stores. Then to cash out your Amex Prepaids you have to make 6 trips to the Costco ATM, and then to your actual bank to deposit your cash. Depending on what you do with your Wells Fargo prepaid cards you might have to go to a different ATM for additional trips. THEN you can finally pay off your cards.

That’s a lot of work.

So is it worth it? let’s say you do that for 5 months in a row and earn 80K SPG points. Using the 5th night free option on SPG, awards, this will entitle you to 5 nights at a Category 6 hotel. It’s not the top-end hotels, but you can still find some good ones like the Westin Paris Vendome, the W Retreat and Spa Bali, The Naka Island Phuket, and the St. Regis Princeville (which will become Category 7 soon). Each of these would likely cost upwards of $500 per night.

We, being smarter than the average traveler, know that it’s unnecessary to pay that much to stay at these hotels. But that doesn’t mean we’ll be staying there free, either. We’d pay $151.25 x 5 = $756.25 for this 5 night stay if we earned our points as described above. That’s still a lot of money, and far from being a free vacation, but much cheaper than it would be if paid with cash outright.

Of course you can get there cheaper by simply signing up for credit cards. If a married couple both sign up for the personal and business versions of the SPG Amex credit cards, they’d have a combined 100K points to spend. THAT’S a free vacation. But you can only do this every couple of years with Amex and SPG since there’s a waiting period when churning cards. Other cards give you more options (including airfare), especially if using a program like Membership Rewards or Ultimate Rewards.

And I’m not saying the SPG card is the best option either. You can definitely earn more points with other cards. The Chase Sapphire, Chase Freedom (with Chase Exclusives), and Amex PRG (with 15K bonus after $30K) could potentially earn you far more points. Heck, even a 2% cash back card would get you back $1,600 on that $80K spend, and could potentially be more valuable to you.

All I’m saying is that point earning from prepaid cards is probably more expensive than it might initially seem. Do the math on your calculations. See if the the cost and time is worth it. If not, maybe you need to adjust your strategy. A few days ago I wrote about fee-free Green Dot Moneypak reloads, and this could help reduce the cost of these prepaid cards.

Note that the Ink cards were special when the $500 gift cards were available because those 16K points a month could have turned into 80K Chase Ultimate Rewards points per month if you decided to go all out. I wouldn’t recommend going all out, but it was an option.

Be mindful when you’re spending money. The potential is there to save you thousands of dollars if you would have paid for that travel anyway, but don’t think it’s free. There’s a cost to prepaid cards, and it’s not always obvious.

Additional Reading

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Comments

  1. great analysis! definitely worth the fees

  2. I would definitely like to include the gas cost as the gas is almost 4$/Gallon here in Atlanta region.

    • Travel Summary says:

      Oh man I had a whole paragraph planned on gas that I forgot! Oh well, I’ll just add a short note in there about gas. Thanks for the reminder…gas definitely isn’t cheap in southern california either!

  3. Good post !!!
    Definitely, it’s not free. Some people may be willing to pay $ 151 or more for the necessary points to stay 1 night at the Paris Vendome or any aspirational properties. But to me, I will pay that amount only if I use the hotel to the max, that is dont go out or mimimal sightseeing , and only if I also have hotel status for the club lounge. I guess I’m cheap.

    • Travel Summary says:

      Everyone travels differently. Some people enjoy the hotel experience, others couldn’t care less. As long as you know the costs you can decide if it’s worth it!

  4. I have 2 BB and my local CVS has tons of VR’s. I can easily manage 10000/month thru BB and may be 4-5000 more using Amazon and other tricks. I am saving points for my Asia trip in Business(4 seats) and all the top hotels.

    I think it depends on the property/trip if the cost for VR etc is worth or not?

  5. Papa Smurf says:

    Good analysis. In the section about married couple signing up for both SPG cards, I’d argue that the payout is actually 120k points – 25k sign up bonus + 5k required spend per card.

    • Travel Summary says:

      Thanks, that’s a good point. I also didn’t even mention that you could sign up for these cards during the yearly increase to 30K points (which is when I signed up for mine last year), so there could potentially be more points to be had.

  6. Great post!

    The time factor is what keeps me away from manufacturing spend using these techniques. Hidden costs + time suck = just not worth the hassle for me (especially since I already have more points / miles than I’ll be able to spend for years to come

  7. I’m just getting on this bandwagon myself. But with no easy Vanilla Reloads around here, my options are more limited.

  8. peachfront says:

    When you manufacture spend, consider the cost of defending an audit. Gift card transactions are subject to the same federal reporting laws as any other financial transaction. Manufacturing $16K a month in apparent spend is going to end up costing someone a lot more than they ever dreamed one of these days.

  9. After the Office Depot dried up the best use of prepaid cards is minimum spend requirements.

    I also agree that it’s better to realize you are getting travel aspirations cheaper than they actually cost. Although if you go with more budget hotel options you could get pretty close to free. It depends on a persons personal travel style and needs.

  10. Lets face it things are slow right now in the points world…………..Any good celebrity on board the flight stories. Here’s one I have one from many years ago on a TWA non-stop from JFK-LAS, with Cher and her then boyfriend Gene Simmons (sans Kiss makeup) and a first class lav. while her kid Elijah Blue Allman ran around the First Class cabin in his diaper/ surreal……………………I’ll keep it clean, so just use your mile high imagination. true story.

  11. “amex prepaid” is not the same as “serve”?
    if not, what is it please?
    if yes, doesnt amex allow an individual to have only bluebird OR serve?
    thanks

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