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Comparing payment methods
Learn how to compare different payment methods: cash, card, rent-to-own, installment, store financing, and layaway.
When paying for small purchases, like coffee or a haircut, paying cash is almost always the best choice. You do not have to worry about its impact on your budget, or paying any unnecessary fees like interest, processing fees, or minimum charge fees. But, when it comes to bigger purchases, cash may not always be readily available or best. Let's look at some scenarios and compare different payment methods.
Scenario 1: Buying a TV
Let's assume you are thinking about buying a TV. The total cost, after taxes, is . You have saved already. Below are the options available to you:
Method | Terms | Total | Notes |
---|---|---|---|
Cash | None | will have to wait until fully saved up | |
Credit card | have to pay off fully in | ||
In-store financing | 6 payments of | ||
Layaway | will have to wait to take home |
Choosing the best option will depend on a mix of your current financial situation, your discipline, and your own emotions.
If your only concern is paying the lowest cost, then cash and in-store financing are the best choices. Credit card may be a choice here, as well, if you can pay off your balance in days. However, if you want to be able to take the TV home with you immediately, and will not have the entire amount saved up in the next month, then in-store financing becomes the best choice.
Scenario 2: Buying furniture
In this scenario, let's assume you are moving from a one-bedroom to a two-bedroom apartment and you need to buy furniture for the second bedroom. The total cost to furnish the bedroom is . You have just put down a deposit for the apartment, so you do not have enough cash to buy the furniture outright. On top of that, your credit score is low, since you just started building your credit history.
Let's look at all the payment options and try to decide on the best one.
Method | Terms | Total | Notes |
---|---|---|---|
no cash saved up | |||
Credit card | have to pay off fully in | ||
not approved | |||
Layaway | will have to wait to take home | ||
Rent-to-own | no credit check, |
In this scenario, we see that two of the options are not available: cash and in-store financing. Cash is unavailable because there is no cash saved up to fully pay off the furniture. In-store financing is also unavailable since the application for the store credit card was not approved, due to a low credit score. This leaves us with three options: credit card, layaway, and rent-to-own.
If your main goal is to pay the lowest cost, then the best choice would be your credit card, as long as you pay it off before the grace period ends. If you cannot pay off the balance in days, then the second lowest cost would be layaway, as long as you do not need the furniture immediately. This would be the best choice if the second room is a guest room that would not be used immediately.
If you need the furniture immediately and will probably take a year to pay off, then rent-to-own becomes the best choice. Even though the total cost initially appears to be the highest, it is actually lower than the credit card's total cost.
Finding the best payment option depends on many factors, from your finances, budget, timeline, and even emotions. It is always a good idea to write all your options down and eliminate the ones that do not work for your situation.
Want to join the conversation?
- Error in explanation about the interest rate of 15.86%(5 votes)
- Thank you for solving that! David, just chill a little. Sangil.Jwa solved the problem. Maybe YOU can offer a correction to a help center.(14 votes)
- Why do people not give me money for free, i wants me sum kfc and v buks(3 votes)
- For the same reason you aren't willing to give me free money or V bucks.(5 votes)
- can i use the envelope method with
my credit card & debit card(1 vote)- Whereas the envelope method was created for use with cash, I suppose you could make it work with a credit card. Just use Monopoly money in the envelopes, and deduct from the monthly amount you allow yourself to charge onto the card. But, why you'd want to do this is a mystery to me.(10 votes)
- Is it better to always do research before buying anything?(2 votes)
- If I'm planning to purchase a refrigerator, a guitar, or a snowboard, then perhaps some research is a good thing to do. But if we're talking about a burrito from a taco truck, then not so much.(6 votes)
- i like getting int this stuff(4 votes)
- What is the best possible payment method?(1 vote)
- The best possible payment method is to pay on time, don't be late with a payment. BUT, paying the full balance every month does not give you any benefits regarding your credit score, so when you can do it, stretch some things out for a few months (not too many months) to prove that you can pay off a debt.(5 votes)
- should i get a credit card(3 votes)
- If you're old enough, you should do that. If you're not old enough to qualify, then don't even try.(2 votes)
- So I'm a little confused about how to interpret the correct interest rate information. How many decimal places are we rounding to? Because if we round 0.863 to the second decimal place(6), we get what I believe is an 85% interest rate, if we round to the first decimal place (8), we get a 7% interest rate. I have number dyslexia, so while I understand this concept, I want to make sure I'm sorting the information correctly.(2 votes)
- If you round to two decimal places, it should be 86% (0.86) interest, while if you round to one decimal place it should be 90% (0.90). Having said that, you should not be rounding interest rates for an accurate number. If you really have to, round up rather than round down since rounding down may lead you to underestimate the cost. I am not sure what interest rate you are referring to though since I have never seen an interest rate that high.(4 votes)
- can i use the envelope method with
my credit card & debit card(3 votes)- You use the envelope method to divide your earnings into different categories based on the budget you plan. If you have labeled one of those envelopes for "credit card payments", then the method will work for you.(1 vote)
- what does this all mean actually??(2 votes)
- if you use a credit card, you're borrowing the money and you will have to pay that back later. on the other hand if you use a debit card, the money is coming from your bank account(1 vote)