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Payment methods intro

Cash is one of the oldest and most straightforward payment methods, where consumers simply exchange physical currency for goods or services. Credit cards allow people to buy now and pay later, using a line of credit that can be paid off in installments. Other options, such as layaway, rent-to-own, and installment plans, let consumers reserve or receive an item immediately, but pay for it over time. Created by Sal Khan.

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Video transcript

- Hi everyone, Sal here. And in this video we're gonna talk a little bit about how you pay for things. And you're probably already familiar with this, but maybe we'll get into a little bit more detail than you might have fully realized. So the most basic form of payment is cash, like this. I'm sure that y'all are all very familiar with this. And this has some advantages. It's accepted almost everywhere. In fact, by law it needs to be accepted. Although I have seen a few situations where people don't wanna accept it, because you gotta carry it around, it might not be safe. Or they just might not have the change necessary to give you back whatever you need to get back in change. But that's what's useful about it. It's very simple, use it everywhere. You don't need technology. You don't need to plug into some type of credit card system in order to verify that someone has the funds because the cash is right there. The negatives, it's a little bit extra stuff that you gotta carry around. It might not be so safe. And you have all of the work of giving you cash, getting change, putting that change in your pocket, then that change drops into your sofa and then you never see it again. And it's not the easiest to keep track of. If I withdraw a bunch of cash from my bank account and then I use it on different things, later on when I go to my bank account I have no idea what I spent that money on. And so it's hard for doing things like budgeting or keeping track of my finances. But cash is always probably part of our mix. Now the next thing, and actually I'll talk about them together that you might be familiar with. When you just see what I'm holding here, you say, oh, those are credit cards. But when you look a little bit more closely, this one right over here is a credit card. And I covered up the important information for good reason 'cause I don't want you to have my credit card number. And this is a debit card. Now they look the same and they'll oftentimes say things like Visa on it or MasterCard on it because they're plugging into that credit card system in order for payment. But what is happening between a credit card and a debit card is actually quite different. A debit card, the money is coming straight from your bank account. So you spend $50 on your debit card, then when you go back to your bank account you're gonna see that it just took that $50 out. A credit card on the other hand, you are borrowing that money. So you spend money on your credit card, you're borrowing it from the credit card issuer. And you need to, well, if you do pay it on time, you won't pay any interest on it. But then if you don't pay it on time you're essentially going to continue to borrow that money. And we talk about that in other videos. And you could pay some interest, and in fact, you'll probably pay significant interest on it. So both of these can be very convenient. And oftentimes you'll see credit card issuers give you all sorts of incentives. Things like, you could see on mine it says cash rewards. They'll give you like 1%, 2%, 3%, maybe rewards for gas or for travel or something like that. But you always have to think, why are they doing that? Why are they giving you back something of value? Well, because their statisticians know that a lot of people like that, but then they end up putting a balance on their credit card and paying very, very high interest on it. And so it might pay off for them in the long run to give you something back so that they can charge you large interest. So be very careful. And also on the other side, there could be some benefits here above and beyond, on the credit card side, above and beyond just the rewards they might give. There's sometimes a safety to it. For example, if someone uses your credit card, some of the credit card issuers say, hey, if there's any fraud or something like that we'll insure you to a certain amount. We can reverse that transaction. So there are also sometimes some safety benefits to it. Now a debit card is actually, even though it looks like a credit card, in a lot of ways, it's very similar to a checkbook of old. The checkbook of old, and I remember sitting in the checkout line watching my mom write a check and they check her ID, and it takes a little bit longer than you're used to at the checkout line. That had some issues with it. It took a long time to write the check and then people had to validate that it's really you. There's no way for, or it's very hard for the store, whoever you're purchasing from to know that you definitely have the funds. And if you don't, you end up with things like a bounced check. So a debit card kind of takes advantage of that. They can verify that the funds are there and it's a lot faster. It has the convenience of a credit card associated with it. But you still see a lot of people paying with things like checks for something, for example, something like rent. A lot of people might pay directly from their bank account and do direct transfer, but you still see a lot of folks paying with checks. Now those aren't the only ways that you could pay for something. You might see things like rent to own, you rent something and then that contributes to you eventually owning it. Stores might do that because it's an incentive for you to at least start renting, saying hey, maybe I could eventually own this thing. There's things like store credit, which is oftentimes like a credit card, but it's specific to that store. They might give you a discount, other rewards for doing it. But at the end of the day, they're doing it usually because they want to become your credit card issuer or they want you to spend more at that store. You also have installment agreements. Hey, it costs $1,000, that's a lot all at once, but you could pay in 10 installments of $100 each. Once again, they're figuring out ways for you to pay it. And last but not least, you have things like layaway. When I was growing up, we had a store, my mom ran a school uniform store. And a lot of people sometimes would put school uniforms on layaway. The reason for doing layaway, which is essentially, you put a little bit of money and the store will lay away, will put aside that article of clothing or whatever you're trying to buy. It has two benefits. One, you kind of reserve that item even if you don't have all the money you need necessarily to buy that item yet. And also, it's a way of putting a little bit of discipline. Hey, I already put $5 towards that $50 item. I'm gonna use it almost like a little place to keep, I'm gonna keep putting $5 at a time so I don't get tempted to spend that and eventually I will get that school uniform or whatever it is. So that's just a start. We could go into a lot more depth in all of that. But hopefully that gives you a little bit more nuance of all of the different types of payments you may use or see other people use. And be thoughtful about, hey, why am I using cash now? Or why am I using a debit card? Or why am I using a credit card? And what are the positives and negatives?