Is a Flexible Spending Credit Card Right for You?

This type of credit card gives you extra purchasing power.

Most of the time, when you get a credit card, it comes with a credit limit. This is the maximum amount you can spend, and transactions that would push your balance over that amount are automatically declined. You might be able to opt in to over-the-limit transactions, but there will be an extra fee for each one.

If you were hoping for a little more flexibility, there is a type of card for that. It's called a flexible spending credit card, and as the name suggests, it doesn't have the same firm limit of other cards.

How flexible spending credit cards work

Flexible spending credit cards have variable credit limits. They still start you off with a set credit limit, just like other credit cards. The difference is that the card issuer allows you to exceed that baseline limit, without an extra fee, on a case-by-base basis.

Card issuers look at several factors when deciding whether to approve over-the-limit transactions. They don't provide exact details on their decision-making process, but factors they consider often include:

• Credit score
• Income
• Spending habits on that credit card
• Transaction amount

Ultimately, the card issuer is assessing the likelihood you repay what you borrow. For that reason, a high credit score and income give you much better odds of success.

Finding flexible spending credit cards is tricky, because card issuers don't advertise this information. However, some reports indicate that Visa Signature® and World Elite Mastercard® credit cards can offer flexible spending limits, if the card issuer approves you for one.

Keep in mind that going over your credit limit means you'll have a high credit utilization ratio. This is your card balance divided by your credit limit, and it's a big part of your credit score. If your credit utilization gets too high, it can hurt your credit.

The traditional wisdom on credit utilization is to use no more than 30% of your credit limit. If you go over your credit limit, you'll have credit utilization of over 100% on that card. This could have a significant impact on your credit score until you get that balance paid down.

An alternative option: No preset spending limit credit cards

Another way to get flexibility with how much you can spend is a no preset spending limit (NPSL) credit card. With this type of credit card, you don't have a fixed credit limit. While there aren't that many NPSL cards available, several American Express cards work this way.

To clarify, having no preset credit limit isn't the same as being able to buy whatever you want. There will be a limit to the amount you can spend, but it isn't preset, and it can adapt over time. Your spending limit will essentially be more fluid than it would be with a regular credit card. With some NPSL cards, you can check your spending power through your account to find out if a large purchase will be approved.

It's also worth noting that some NPSL cards are charge cards. When you use a charge card, you're expected to pay the bill in full every month. You can't carry a balance, like you can with a credit card (although it's recommended to pay credit cards in full every month to avoid interest charges).

Is a flexible spending credit card right for you?

It's normally better to avoid getting too close to your credit limit. As mentioned above, if you max out your credit card, it damages your credit score. Also, if you can't pay off your balance, then you'll have credit card debt to deal with.

A flexible spending credit card could be helpful in a pinch. If you have a big purchase to make that your credit limit doesn't cover, it's nice to have some wiggle room. That's assuming you can pay off the full amount within a reasonable timeframe.

But that's probably not a situation that's going to come up often. Consumers who make large purchases, and have the income to afford those purchases, tend to get high credit limits.

Instead of focusing on flexible spending credit cards, here are a few better options:

• Ask for a credit limit increase with your current credit card. Most card issuers let you do this online or by phone. If you've consistently paid your bill on time, you could qualify for a credit limit increase.
• Check out high limit credit cards. These are credit cards known for offering high credit limits.

Ideally, your credit limit should be high enough that you can make the purchases you want and still have plenty of room to spare. That way, it's easy to maintain low credit utilization and have good credit.

If you're new to credit cards, this takes time. Credit card companies generally give out low limits until you've established your credit score. You might need to manage your card's balance carefully for now and avoid large purchases. But if you always pay on time, you'll work your way up to higher credit limits.