What is a flexible spending credit card?

Highlights

• A flexible spending credit card is a product offered by certain financial institutions that may have a variable credit limit based on your ongoing account activity.
• The credit limit on a traditional credit card usually cannot be exceeded but can also be changed in certain situations.
• Keeping transactions within your credit card limit is important to managing your credit responsibly. 

What does flexible spending credit card mean?

Flexible spending credit cards are a specific type of credit card offered by select financial institutions.disc-chase-does-not-offer The terms of this financial tool can vary greatly, but generally speaking, a limit isn’t set for the amount you can charge to the card. On credit cards, that limit is commonly known as a credit limit is set by the card issuer and varies depending on a cardmember’s financial profile. Transactions like purchases and cash advances count toward that limit, and additional transactions usually aren’t allowed once the credit limit is reached.

With a flexible spending credit card, the credit limit may be more variable. On the one hand, the limit could be increased or decreased on a regular basis—maybe each month, for instance. On the other hand, you might be allowed to go over your credit limit regularly without any penalties or negative consequences, such as over-limit fees. The term “flexible” might be a bit misleading, though. Nearly all credit cards have some type of hard limit that, once reached, will result in new purchases on the card being declined.

Are there benefits of treating your credit card limit as flexible?

Credit card issuers usually set credit limits on cards based on a careful evaluation of a person’s creditworthiness, including their income information. With a traditional credit card, you may be able to exceed your credit limit if that was part of what you agreed to in your cardmember agreement. However, even if it’s allowed by your card issuer or lender, there could be repercussions.

Downsides of a flexible spending credit card

Exceeding your credit limit on a credit card can have several downsides. These may not apply to a flexible spending credit card, but it depends on the card.

Unless your card’s terms and conditions say otherwise, here are some reasons why it’s usually better to stay within your credit limit:

• Overlimit fees: Many credit card issuers charge fees when you exceed your credit limit. These fees can be substantial and may add to your overall debt. Even flexible spending credit
• Interest charges: Going over your credit limit could result in interest quickly accumulating every month on  your remaining balance. A credit card balance that gets out of control could make debt difficult to manage.
• Credit score impact: Your credit utilization ratio, the ratio of your credit limits that you use, is an important factor in your credit score calculation. Exceeding your credit limit increases your utilization ratio, which can negatively impact your credit score.
• Card suspension or declined transactions: Credit card issuers may suspend your card or reject transactions if you consistently exceed your credit limit. This can be inconvenient and limit your ability to use the card for necessary expenses.

Flexible spending credit card could also refer to a Flexible Spending Account

Although some banks offer flexible spending credit cards, the term may also refer to the debit or credit card associated with a Flexible Spending Account (FSA). This is a type of savings account that can be used to pay for specific expenses, usually out-of-pocket healthcare and dependent care costs. When setting up an FSA with an employer, you may choose to add an amount of money from each paycheck. To use this money, a physical card might be issued, which is why flexible spending credit cards are sometimes confused with FSAs.

In summary

If a flexible credit card product sounds like it might fit your financial goals and habits, there are some financial institutions that issue this type of product. But traditional credit cards can have many benefits, too, and staying within your credit limit is an important part of managing your credit responsibly. Consistently needing more credit than your limit allows, may mean you should reassess your spending habits and budget. Credit card issuers may offer some guidance if you have concerns about your credit limit or financial situation.