Comparing Methods of Payment
Let’s look at various ways people can pay for purchases.
• Cash: Using paper bills and coins to pay for purchases is called paying in cash.
• Debit card: Most debit cards take the money to pay for a purchase out a person’s bank account. There are also prepaid debit cards. These are similar to gift cards. An amount of money is “loaded” onto the debit card. Purchases are deducted from the amount of money on the card. People can put more money on a prepaid debit card whenever they need to.
• Credit card: A credit card company pays for a purchase someone makes, and the person pays back the money to the credit card company in the future.
• Electronic wallet: Many people have an electronic wallet (also called a digital wallet) on their smart phone or smart watch. Their electronic wallet is linked to their credit card or debit card. When they tap their phone or watch on a payment terminal (the device used to make electronic payments), the price of their purchase comes out of their bank account (if a debit card is used) or is added to their credit card bill.
• e-Transfer: An e-transfer is a banking service that allows someone to send money to or receive money from another person’s bank account.
• Cheque: A cheque is a slip of paper that tells your bank to pay a specific amount of money to a particular person, business, or organization. The bank takes this money out of the chequing account of the person who wrote the cheque.
• Coupons: A coupon can reduce the purchase price of an item by a set amount (for example, “Get $1.00 off”). Some coupons allow consumers to get two of the same item for the cost of one (“Buy one, get one free”). You can look at coupons as paying part of the original cost. The consumer chooses another method of payment to pay the rest of the cost.
• Rewards or points: Many stores—and some credit card companies—offer consumers points or some other kind of reward for shopping at the store or using the credit card. These rewards are part of a loyalty program. A loyalty program encourages consumers to continue to shop at the store (or to use the credit card) so they can gather more rewards or points. Points usually have a cash value (for example, 10 000 points might be worth $1.00). People can use points to pay for all or part of a purchase.
Advantages and Disadvantages of Various Payment Methods
Let’s look at some of the advantages and disadvantages of a few methods of payment.
Paying with cash limits your spending to the amount of cash you have with you, so you can’t spend more than you planned to spend.
• If cash is lost outside the home or stolen, it’s unlikely that you will ever get it back.
• Expensive purchases require a large amount of cash. Carrying a large amount of cash can be risky.
• If you lose your debit card, no one can use it unless they figure out your personal identification number (PIN).
• A debit card allows people to make unexpected purchases if there is enough money in their bank account.
• A debit card makes it easy to make unexpected purchases you don’t really need and do not have the cash with you to pay for.
• If you are trying to save money in your bank account, a debit card can make it tempting to spend some of this money.
• A credit card can allow people to make necessary purchases when they don’t have the money for the purchases.
• Some credit cards offer a loyalty program that people can benefit from.
• Some credit cards charge an annual fee.
• Each month, credit cards charge an extra fee (called interest) on money that is owed to them but not paid back promptly.