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Financial Literacy
Scenario: comparing payment methods
How do you decide which payment method is best? Let's look at cash, credit card, store credit, rent-to-own, and layaway as payment choices, compare the pros and cons of each, and learn about the thought process that helps us decide on the best one. Created by Sal Khan.
Want to join the conversation?
- Is cash the only payments method the government wants?(4 votes)
- Governments often accept payments by card, but they may ask for a few percent extra, because "taking" a few percent is how the credit card companies make their money. For example, when you use a card to purchase $100 of stuff from a store, the credit card company only pays the store $97. Governments want the entire $100,so they'll charge you extra for the convenience of using a card.(3 votes)
- I'm kind of confused, so you don't pay the APR if you pay back within the grace period, but then what counts as late for the late fee? How long can you delay and pay APR before it's "late". I plan on paying by the grace period, but just want to know all the possible scenarios.(2 votes)
- Let's start with an example. Assue that you already have a credit card. On the first day of the month, you buy a lot of new computer games, and charge them all to your credit account. They cost you $100. That's when the "grace period" begins.
When your bill comes, if you pay it right away, you only pay $100, and all is square.
If you pay only $20, you're still "on time", but the next month you owe the remaining $80 PLUS interest on the loan, computed at the APR.
If, however, you fail to make your payment on time, you owe the $100 PLUS the interest on the loan (calculated at the APR) PLUS the late fee, and if you let it go another month, you owe all of that PLUS interest on the late fee calculated at the APR.
The moral of the story is, pay on time.(5 votes)
- How many credit cards at a store should have?(3 votes)
- find having more than two credit cards to be a matter of vanity, which I try to avoid. Even having two can sometimes be "one too many." But having one seems to be necessary for life in the 21st century.(3 votes)
- Does the grace period apply immediately after you complete a purchase?(2 votes)
Video transcript
- [Instructor] Let's
say that we have decided to buy a television for $499. And we now need to think about how we are going to
pay for this $499 television. And we know we have
many different options, and I'm presenting five of
them to you in this video. We could pay with cash
slash debit, we could pay with a credit card, store
credit, rent-to-own or layaway, and the different terms are available. So pause this video and think about in what scenarios would
you pick different options, and then we will work through it together. All right, so let's think about the first scenario
where you have money now. So you have at least, let's
say, $500 in your bank account. Have money now. Well then of course, paying with cash slash debit is an option, and it's never a bad option. Now you could pay with the credit card, but in that scenario,
I would encourage you to pay the balance off within
the 28-day grace period, so that you don't pay this almost 19% APR. That is very high interest
that you want to avoid. So here, I'm just gonna
put an asterisk here. Pay off. Pay off in grace period. In grace period. And we could think about the
store credit the same way. The store credit's at six
months interest-free financing. So you could view it as
a six month grace period. So I could check that, but once again I would wanna pay it
off in that six months, so that I don't start
incurring that interest, which will probably be similar
to that credit card interest. Now I know myself psychologically. I like not having to worry about whether I'm paying
these things on time. So for me personally, I definitely would gravitate
towards the cash slash debit. Now, some folks, the credit card might have
some rewards that you get back. They don't mention them here, but that might be an incentive. But the reason they do that again is that they hope that you don't
pay in that grace period, and you start incurring this
really, really high interest. Now, rent-to-own would not make sense. You have the money, and we could see what this is costing you, $45 per month for 12 months. Multiply that out, how
much are you paying? Well it turns out you're
paying more than $500, 45 times 12, you are paying $540 here. So for the privilege of renting to own, you're paying an extra
$41 over that 12 months. So there is some interest in there, just in terms of that extra
money that you're paying. It's just not called interest. And then once again, layaway, you don't even get the television now, even though you want the television now, and you're paying a $5 setup fee. So that's money that you
wouldn't otherwise have to spend if you just paid it in cash or did some of the other options. So I would definitely go with one of these first three,
probably the cash debit. Now if you don't have the money, so don't have money, don't have money now. I would try to stay away
from that credit card, because that's a really, really, really, really high interest rate. I think if you think
you can get that money within the next six months, this six month interest-free financing from the store sounds pretty good. If within six months you
can save up the money and you're gonna get the TV
now, then you can pay that down and pay it off in this
interest-free period. Once again, I'd be wary if
you have to go beyond that. The rent-to-own is definitely
worse than the store credit if you're able to pay it
off within six months. If you think it'll take you 12
months or more to pay it off then you have to think about what would be the
interest on the store credit, and then what is the interest
that this roughly $40 that they're charging to you. What does that amount to roughly? $40 on roughly $500 over 12
months is roughly 8% interest. So it's still better than a credit card. So if you don't have the money
within the next six months, if you're talking 6 to 12 months, you have to know a little bit more about the interest on the store credit to decide between these two. And then once again, if you
don't have the money now, the store credit is still
better than the layaway, because you're not having to pay this $5 and you get the TV immediately, while in layaway the TV just
gets laid away someplace in the back of the store,
no one else could buy it. But you're not going to see
that TV until you pay for it. While with the store credit, you're going to get it immediately. So my bias, if you have
the money now, cash debit, maybe credit card if you're disciplined about paying it off fast. And then if you can save up the money in the next six months, the
store credit looks pretty good with the interest-free financing.