Payment methods | Consumer credit | Financial Literacy | Khan Academy

- 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?