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Financial Literacy
Using cash vs. credit card, and other payment methods
Learn about the pros and cons to using different payment methods.
What is the best way to pay for something?
There is not necessarily a "best" way to pay for something – it depends on your personal preferences and financial situation. Typically, people use cash, debit, or credit cards as payment methods, but there are other ways to pay for something. Let's look at the three most common ones and then we can discuss other payment options.
Types of payment methods
Cash
Cash can be a good option if you want to avoid overspending, as you're limited to the amount you have on hand. However, carrying large amounts of cash can be risky, and you won't be able to make large purchases this way.
Debit Cards
Debit cards pull money directly from your bank account, so you don't have to worry about incurring interest charges like you would with a credit card. However, some people don't like that debit card transactions can take a few days to process, which can make it difficult to keep track of your account balance.
Credit cards
Credit cards allow you to borrow money to make purchases, which can be helpful if you don't have the funds readily available. Additionally, some credit cards offer rewards like cash back or travel points. However, if you don't pay your bill in full each month, you'll be charged interest on your outstanding balance. Credit cards can also be a temptation to overspend, which can lead to accumulating debt.
Payment Method | Pros | Cons |
---|---|---|
Credit Card | Allows purchases without immediate funds | Can lead to overspending |
Offers consumer protections | High interest rates | |
Can help build credit score | Potential to damage credit score | |
Debit Card | Avoids overspending | Less consumer protection |
Convenient | Vulnerable to fraud | |
No interest charges | ||
Cash | Accepted in-person anywhere | Can't be used online |
Helps with budgeting | Inconvenient or unsafe to carry in large amounts |
What are other ways to pay for items?
There are ways that consumers can buy things on credit without using a credit card. Here are four common alternatives:
Rent-to-Own
With rent-to-own agreements, consumers can take home items like furniture, electronics, or appliances, and make weekly or monthly payments on them until they are paid off. Rent-to-own stores usually do not require a credit check, which makes them a popular option for people with bad credit. However, consumers should be aware that they usually end up paying much more for items than they would if they bought them outright.
Store Credit
Many retailers offer store credit (or in-store financing), which lets consumers buy items and pay for them over time. Store credit can come in the form of a line of credit (like a credit card), or an installment plan, where consumers make fixed monthly payments over a set period of time. For example, if you buy a new TV from a store that offers store credit, you can pay for it in 12 monthly installments. While some stores offer zero-interest financing, others may charge interest or fees.
Installment Agreements
An installment agreement is a type of contract that lets a consumer buy a product or service and pay for it over time. It is similar to store credit, but it can be used for a wider range of purchases. For example, you might use an installment agreement to buy a car, pay for a medical procedure, or even finance a vacation. With an installment agreement, you agree to make fixed monthly payments for a set period of time, usually with interest.
Layaway
Layaway is a purchasing arrangement that some stores offer to customers. With layaway, a customer can reserve an item they want to buy, and make payments towards the total cost over time. For example, if you want to buy a TV that costs dollar sign, 500 but you do not have the full amount at the time. With layaway, you can pay for the TV by paying a certain amount each week or month until you've paid the full retail cost. Once you've paid in full, you can take the TV home.
Layaway is sometimes used as an alternative to credit cards or other forms of borrowing, as it doesn't usually involve interest charges. However, some stores might charge a service fee for setting up a layaway plan.
Want to join the conversation?
- Can somebody please simplify the meaning and difference of Store Credit Payment, Installment Arrangement, and Layaway?(7 votes)
- Hi! Maybe examples will help? Store credit payment is a type of a credit card that can only be used at that store. For example, some electronics stores, like Best Buy, offer you to make payments on items you buy at their store. They will issue you a Best Buy credit card and you can buy items at their store and make payments on them later on. The catch is, you cannot use that credit card anywhere else, just Best Buy. That makes it a store credit.
Installment agreement is an agreement where you agree to pay something in payments. An example would be braces. Your dentist may agree for you to pay for your braces over a year's time, instead of paying for them completely upfront. A car loan is type of installment agreement, as well.
Layaway is a type of payment where you make payments for an item over time, but you do not get to take the item home until it is fully paid off. With credit and installments you do. Hope that helps!(15 votes)
- Is "Rent To Own" a good payment plan?(3 votes)
- Rent to Own places are a bad idea. They sell shoddy stuff, and charge you so much for it. It would be better to furnish your house with cheap patio furniture or stuff hauled out of peoples' basements and garages until you save enough to buy what you are looking for.
Rent to own is something to avoid.(20 votes)
- I finished these lessons a while ago, but I had a question... Let's say a guy named Jimmy wants to buy a graphics card for $550 at his local tech retailer. He can pay for it in full at the store with his debit card, but wants to grow his credit score and gain a reputable history. Would it be a wise choice for him to use his credit card, allowing him to pay off this "debt" within the allocated time knowing that he will have the funds reserved for this purchase? Thanks in advance.(6 votes)
- That seems to be a mature plan on the part of Jimmy. He had the ability to defer gratification of his wish for the item for long enough to amass the funds, so he will likely have the same ability to hold onto the funds for the length of the time it takes for him to retire the debt and create a credit record on the way. It will cost him some interest payments, but the result will likely be worth it.(4 votes)
- is it better to pay the whole amount when paying something off or is it better to make a payment plan(2 votes)
- Paying things off completely is probably better for your soul, but paying them off over time, and never making a late payment, is better for your credit score.(9 votes)
- What about OMNY, is OMNY a payment method?(3 votes)
- An OMNY card is like a debit card or a gift card that someone gives you. The money is first put into the account, and is accessed through use of the card. It is not a payment method, merely a cash substitute.(6 votes)
- Sal should go more in detail with this(2 votes)
- no tengo preguntas(3 votes)
- yea is it a payment?(1 vote)