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Payment methods | Consumer credit | Financial Literacy | Khan Academy

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

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Video Language:
English
Team:
Khan Academy
Duration:
06:14

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