Perhaps you’ve dreamed of a world in which your credit card doesn’t have a limit—you could simply charge whatever you want and pay it back later. Unfortunately, issuers aren’t usually willing to open up the coffers and let us run wild. Instead, they limit their most permissive lending to only the borrowers posing the least risk. A flexible-spending credit card offers a middle ground of sorts, providing a certain amount of wiggle room while still allowing the issuer some control.
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What Is a Flexible Spending Credit Card?
A flexible spending credit card allows you to exceed your credit limit when certain conditions are met. To see how these compare to more traditional credit cards, it helps to understand the different ways lenders approach over-limit spending.
What Is a Credit Limit?
Credit cards are typically issued with a fixed credit limit. As with any source of revolving credit, this limit establishes the maximum amount that can be borrowed on the card. Depending on the type of card and its intended user demographic, limits can range from a few hundred dollars to tens of thousands of dollars.
The exact limit for any one credit card account is usually based on factors unique to the applicant, just like any other loan. This includes credit score, credit history and other metrics of creditworthiness used by lenders to assess risk. The flexibility afforded by high-limit credit cards is perceived as advantageous, while low-limit credit cards are inherently safer for the issuer and as such are more easily approved.
Over-Limit Spending
With most credit cards, there are strong disincentives for reaching or exceeding a credit limit. Ideally, you want to stay at 30% or below of your total credit limit whenever possible, as a cardholder’s credit utilization ratio impacts how successful they’ll be at seeking lines of credit in the future. Credit card issuers also tend to limit overspending directly: It’s common for charges to simply be declined at the point of sale once the credit card’s limit is reached. This means the card stops working completely until charges are paid off or the next billing cycle starts.
Alternatively, cardholders who opt into over-limit protection (which can keep an over-limit charge from being declined on the spot) risk incurring penalty fees for over-limit spending. For serious over-spenders, issuers can also reduce the cardholder’s credit limit, increase the interest rate or even suspend a credit card account altogether. If the cardholder runs out of money when trying to cover an inflated bill, they may also face returned payment fees.
Regular Credit Card vs. Flexible Spending Credit Card
Flexible spending credit cards work largely on the same principles as traditional ones—they still act as fully functional credit cards. They differ only in that they employ a variable credit limit. A pre-set credit limit serves as a baseline, but the cardholder has the opportunity to effectively increase it at certain times without getting dinged.
With a traditional, fixed-limit credit card, the issuer’s evaluation of a person’s creditworthiness is largely confined to the application process. By contrast, with a flexible spending credit card, the issuer reassesses your use of the card to determine the extent of approved over-limit spending. This means that ongoing changes in the cardholder’s finances can impact how they’re able to use the card. When the cardholder doesn’t exceed their baseline credit limit, their flexible spending credit card is virtually the same as a traditional one.
How Do Flexible Spending Credit Cards Work?
Taking advantage of a variable credit limit all hinges on the issuer’s willingness to lend extra. Issuers assess the cardholder’s financial standing and see how that stacks up against the extent of the desired over-limit spending. Factors considered include:
- Cardholder’s credit score and credit history
- Cardholder’s overall spending habits
- Cardholder’s income (ability to pay)
- Cardholder’s history of payment to the issuer
- How frequently the cardholder seeks over-limit credit
- How much value in over-limit credit the cardholder seeks
Issuers will approve or decline over-limit spending charge by charge to ensure it doesn’t fall too far out of line with normal spending habits. Issuers don’t publicize exactly how they decide to approve or decline over-limit spending, but their decisions theoretically should follow the same principles as most risk assessments for lending.
Excellent creditworthiness based on the factors listed above should lead to the most leeway in over-limit spending, as issuers will be most confident in the cardholder’s repayment capabilities. (Strong credit also affords the highest likelihood of getting a flexible spending credit card in the first place.) By the same token, cardholders with less-impressive credit histories will find over-limit opportunities to be less available and less rewarding.
Pros and Cons of Flexible Spending Credit Cards
Sometimes the most enticing perks also represent the greatest liabilities to the cardholder. Flexible spending credit cards often include excellent perks in exchange for high APRs and other fees. Carefully read the fine print of any card you evaluate.
Benefits of a Flexible Spending Credit Card
When over-limit spending is approved, a flexible spending credit card user enjoys advantages similar to those of a traditional card with a higher fixed credit limit. Due to the higher degree of issuer oversight, a flexible spending credit card can be an easier way to receive approval for more credit than requesting a credit-limit increase on a traditional card. Some cardholders rarely take advantage of over-limit spending, but enjoy having the flexibility just in case.
The main benefit of a variable credit limit is that it allows cardholders to sidestep the downsides of over-limit protection and avoid receiving a declined notice at the register. This makes it easier to rely on a credit card for the occasional large purchase or for unexpected spending during an emergency. Likewise, it can better help smooth out short periods with a loss of income. In all these cases, flexible spending enhances the credit card’s value as a convenient form of short-term loan, but also poses major downsides when it comes to credit utilization and the risk of carrying a balance.
Downsides of a Flexible Spending Credit Card
The largest and most alarming downside of flexible spending limits is the increased risk of debt. Cardholders generally set out expecting to pay bills on time and keeping up can prove hard enough, but jacking up the occasional monthly bill to 100% of a credit limit undoubtedly makes this harder.
For similar reasons, flexible spending credit cards can be a deceptively poor tool for crawling out of serious financial hardship, despite its usefulness in a pinch. A variable credit limit, just like the credit card itself, is best viewed as a convenience rather than as a way to consistently borrow beyond means. This is due to credit card interest rates being much higher than those offered by other common forms of loans, making for highly inefficient borrowing for periods any longer than a month.
A flexible spending credit card also threatens harm to the cardholder’s credit utilization ratio, which significantly affects a credit score. If issuers report credit limits for flexible spending credit cards, they report only the baseline credit limit, not the variable increases. This means that for a certain length of time and on some issuers’ accounts, a cardholder’s credit utilization rate could actually exceed 100%. Not all issuers report this way, so be sure to read your card’s terms and conditions carefully or call your issuer.
How Are Flexible Spending Cards Used?
While flexible spending credit cards lend a little extra purchasing power, they’re used much the same as are traditional, fixed-rate credit cards.
How Do I Figure Out My Available Credit?
An easy way for any cardholder to check available credit is to check via your account’s online or mobile banking access. A variable credit limit can make putting a finger on available credit a little more complicated, but account access through mobile apps or a web browser means a quick check is easier than waiting to receive a statement in the mail.
Many cardholders check available credit before making a major purchase to ensure they’re using the credit limit as they intend. Calling an issuer ahead of time is rarely necessary, but it can be a good idea with issuers approving over-limit purchases on a case-by-case basis. They may be willing to further raise the cardholder’s limit for a purchase so long as the cardholder’s financial standing supports it. They can also inform the cardholder when certain over-limit purchases won’t be approved.
What Can You Buy With a Flexible Spending Credit Card?
Flexible spending credit cards can be used anywhere that accepts the issuer’s cards as payment. The only difference in day-to-day use is with purchases going beyond the baseline credit limit. Guidelines for exactly what over-limit purchases are approved vary by issuer and by individual cardholder, but the amount by which the cardholder seeks to exceed a baseline credit limit should matter more than the specific purchases being made.
Can You Save Money With a Flexible Spending Credit Card?
Unlike a regular card paired with over-limit protection, a flexible spending credit card saves an over-limit spender from incurring extra fees. More importantly, the added flexibility can save money in situations where being able to cover a large, unexpected expense right away avoids more significant future losses. For example, this easy access to extra credit could help a small business quickly replace a broken piece of equipment and avoid temporarily shutting down or losing business.
Unfortunately, over-limit spending as a perk might entice cardholders to spend more than usual. If these expenses turn into unwanted credit card debt, they quickly become more costly than would most other forms of financing a purchase. So while flexible spending credit cards can save money in a pinch, the pinch becomes a punch when not carefully prepared for.
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Bottom Line
Flexible spending credit cards can be a useful tool for specific credit needs, but pose major disadvantages, too. For cardholders determined to access an extra little bit of available credit, these cards can beat out many of the alternatives. It’s important to recognize, though, that their main advantage over traditional credit cards only comes into play when spending is high and credit utilization best practices are not followed. Like any form of revolving credit, flexible spending credit cards can backfire badly.
Frequently Asked Questions (FAQs)
What is a flexible spending account?
Flexible spending credit card accounts are often mistaken for flexible spending accounts (FSAs), which are an unrelated type of employer-based account for out-of-pocket healthcare expenses. To add to the confusion, these FSAs are often linked to stored-value cards known variously as flexible spending cards, flexible benefit cards or flex cards. These products don’t typically involve borrowing and are not credit cards.
What’s the difference between flexible spending credit cards and charge cards?
Both can facilitate cashless spending without a fixed limit, but charge cards function quite differently than credit cards. Even though issuers bill on a monthly basis, charge cards are a form of non-revolving credit, so they must be paid off in full in order to continue functioning. This means a balance can never be carried past the end of a billing cycle. Charge cards may walk and talk like a credit card, but funding them might be a little more like paying off a series of individual cash loans.
What is a no preset spending limit credit card?
“No preset spending limit” describes a credit card lacking a traditional, fixed credit limit, though it does not mean unlimited. There’s a lot of overlap between NPSLs and flexible spending credit cards, and some financial institutions consider them to be one and the same. Others categorize them differently, as NPSL cards may lack the stated baseline flexible spending credit cards use to dictate what counts as over-limit spending. In either case, how much cardholders are allowed to spend is determined by the issuer’s assessment of creditworthiness and ability to pay.