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What Is a Flexible Spending Credit Card? Benefits & Risks
August 30, 2024
Most credit cards come with a fixed credit limit that caps how much you can spend. Go over that limit and your transaction will likely be declined - unless you have a flexible spending credit card.
A flexible spending credit card provides some wiggle room to exceed your preset credit limit without triggering over-limit fees or a declined purchase. This feature can come in handy if you need to make a large, unexpected purchase that would normally exceed your available credit.
So how exactly do flexible spending credit cards work? What are the potential benefits and drawbacks? And are they the right choice for your financial needs and spending habits? Let's take an in-depth look at this unique type of credit card.
What is a Flexible Spending Credit Card?
A flexible spending credit card allows you to exceed your assigned credit limit up to a certain amount on a case-by-case basis. Your card starts with a standard preset limit like any other credit card. But with a flexible limit, you have the ability to go over that limit if needed without incurring an over-limit fee.
The issuer will dynamically evaluate your account and decide whether to approve or decline over-limit transactions based on factors like your:
- Credit score and credit history
- Income and ability to repay
- Account history and spending patterns with that issuer
- Amount of over-limit spending requested
- Frequency of over-limit spending
For example, let's say you have a flexible spending card with a $5,000 credit limit. Your washing machine unexpectedly breaks down and you need to charge a $6,000 replacement. Rather than getting declined, your card issuer may approve the over-limit $6k transaction based on your positive history with them.
This extra spending capacity doesn't come automatically though. The card company reassesses your credit risk each time you attempt to exceed your limit. If you've maxed out the card and are behind on payments, don't expect much flexibility.
Popular flexible spending credit cards include certain Visa Signature and World Elite Mastercard products, if approved by the issuer. Some American Express charge cards also have no preset spending limit (NPSL), though these require you to pay your bill in full each month.
Flexible Spending Cards vs. Traditional Credit Cards
Flexible spending credit cards function similarly to regular credit cards in most respects - you can use them to make purchases anywhere the card is accepted and you'll owe interest if you carry a balance. The key difference is how they handle transactions that exceed your preset credit limit.
With a traditional credit card, maxing out your limit means your card will likely be declined for new purchases until you pay down the balance. Some card companies let you opt-in to over-limit spending, but they'll charge a fee (up to $35 but no more than the over-limit amount). Going over your limit can also trigger a penalty APR or account closure.
By contrast, flexible spending cards give you a buffer to exceed your preset credit limit without fees or penalties on a case-by-case basis. This doesn't mean unlimited spending; the issuer determines your capacity based on factors like your income, credit history, and spending patterns. But it does provide a helpful cushion if you need it.
On the other side of the spectrum, charge cards, while they too facilitate cashless spending, operate on a different principle entirely. Unlike both traditional and flexible spending credit cards, charge cards do not have a pre-set spending limit. However, this doesn't imply unlimited spending capability. Instead, the full balance on charge cards must be paid off at the end of each billing cycle, making them a form of non-revolving credit. Essentially, each month's spending on a charge card must be fully cleared, akin to repaying a series of individual cash loans. This unique feature sets charge cards apart, emphasizing that they should not be considered similar to credit cards in financial management terms, despite the superficial similarities in usage.
Benefits of Flexible Spending Credit Cards
A flexible spending credit card allows cardholders to make purchases at any vendor that accepts cards from the issuing company. The unique feature of these cards is their ability to approve expenditures that exceed the initial credit limit. The approval of these over-limit purchases depends on the policies of the card issuer and the specific terms allocated to an individual cardholder’s account. Typically, the focus is on the amount by which the cardholder wishes to surpass their credit limit rather than on the exact nature of the items or services being purchased.
This flexibility means you're less likely to face a declined purchase by occasionally going over your credit limit. It can provide peace of mind knowing you have a bit of extra capacity when needed.
Some people value having this flexibility even if they rarely go over their limit. It's a "just in case" layer of protection for unplanned purchases or financial emergencies. And if you never exceed your preset limit, a flexible limit card essentially functions the same as a regular card.
Drawbacks of Flexible Spending Credit Cards
While the ability to exceed your credit limit penalty-free may sound appealing, flexible spending cards have some significant potential drawbacks to consider:
- Can encourage overspending and debt: The psychology of "available credit" may tempt you to spend more than you otherwise would, leading to high balances that are hard to pay off. Flexible limits make this even easier.
- Hurts your credit utilization: Your credit utilization (balance/limit ratio) heavily influences your credit score. Maxing out your card, let alone exceeding your limit, will drive utilization well over the recommended 30% threshold and damage your credit.
- No unlimited spending: Don't expect to exceed your limit by massive amounts, especially frequently. Issuers still cap your capacity based on ability to repay.
- Harder to track available credit: With a fluctuating usable limit, it's harder to know exactly how much you have available to spend at a given time. This can make budgeting tricky.
- Potentially higher interest rates: Flexible limit cards may charge higher APRs than traditional cards, increasing your interest costs if you revolve a balance. [More: Understanding Credit Card APR]
The added spending capacity of flexible cards only helps if you can repay what you borrow in a timely manner. Habitually exceeding your credit limit and carrying a balance will harm your credit and rack up expensive debt. Treat over-limit spending as a rare emergency fallback rather than a regular occurrence.
Alternatives to Flexible Spending Cards
If you need a higher credit limit, consider requesting a credit limit increase on an existing card. Issuers will often raise your limit if you've used the card responsibly. Or look into applying for a new card with a high preset spending limit.
For large planned purchases, you may get better terms with a personal loan, which often has lower rates than credit cards. And if you tend to max out your cards, focus on paying down balances and keeping utilization low to improve your credit and qualify for higher limits over time.
What is a no present spending limit credit card?
A "no preset spending limit" (NPSL) credit card does not have a fixed spending limit like traditional credit cards. Instead, the spending limit can vary, depending on factors such as the cardholder's credit history, spending patterns, and financial resources. While NPSL cards offer more flexibility than standard credit cards, they do not offer unlimited spending. Credit card issuers periodically evaluate the cardholder's financial stability and adjust spending limits accordingly. This type of credit card is similar in many ways to flexible spending credit cards, though some issuers may define them distinctly based on specific credit policies.
The Bottom Line
A flexible spending credit card can be a helpful tool if used judiciously and you have the means to pay off what you spend. The ability to occasionally exceed your preset credit limit without penalties adds a level of convenience and security.
However, flexible limits also present risks of overspending, debt problems and credit damage if abused. Approach them cautiously and aim to stay below your regular credit limit whenever possible.
As with any credit card, the key is to spend within your means and pay off your bill in full each month to avoid interest. With the right financial habits, a flexible spending credit card can be a useful addition to your wallet.
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With Kudos, you can:
- Get personalized recommendations on the best card to use at checkout to earn the highest rewards and benefits based on your spending habits and card portfolio.
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By combining the strategic use of a flexible spending credit card with the power of Kudos, you can optimize your credit card usage, maximize your rewards, and enjoy a more convenient and secure shopping experience. Best of all, Kudos is completely free to use, making it an excellent addition to any savvy credit card user's toolkit.
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Editorial Disclosure: Opinions expressed here are those of Kudos alone, not those of any bank, credit card issuer, hotel, airline, or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post.
