Forms of Currency
In our country's financial system, we have quite a few forms of payment available for use. Let’s break down the different forms of payment and currencies.
Cash:
Bills and coins, which most of us are familiar with, are physical tender used to pay for goods and services.
Pros:
Privacy
No hidden fees
Low risk of debt
Cons:
Less security – no fraud protection and can be stolen/go missing
No rewards
Difficult to track spending
No online purchases
Less practical for large expenses
Check:
A check is an official written, dated, and signed document that directs a bank to pay a specific sum of money to its recipient. Each check is linked to the specific bank account and routing number of the individual who writes it. When a recipient deposits or cashes this check, their bank withdraws the designated amount from the account of the payer.
As tools like Venmo and banking apps expand their capabilities, checks are becoming less common. As a result, writing a check isn’t common knowledge like it used to be. If you’d like to learn how or need a refresher, here’s a guide.
Pros:
Security: Becasue checks are personalized, they are difficult to forge and steal. Furthermore, physical checks are not at risk of digital fraud.
Record of payment
No fees
Cons:
Not accepted everywhere
No online purchases
Have to purchase checks from the bank
Debit:
Debit cards are physical cards that are connected to an individual’s bank account. Debit cards got their name from the bookkeeping term “bank debit,” which occurs when the deposits held by a bank customer are reduced. When a user pays using a debit card, the dollar amount is deducted from their bank account.
With services like Greenlight, which provides debit cards for kids, parents can help teach their children about finances and promote healthy financial habits from an early age. Parents can regulate and block spending through the app.
Pros:
Interest-free
Widely accepted
Can help with budgeting
Cons:
Overdraft fees at most banks when you overspend
Limited fraud protection
Credit Cards:
Credit is another form of payment that involves borrowing money. The bookkeeping term for “credit” refers to the action of money being added to an account. Credit cards have a similar function to debit cards, but rather than withdrawing money from the user’s account, they charge the credit card provider, whom the user then has to pay back later.
Credit cards have many benefits over debit cards. For example, most credit cards offer cash back, meaning that for every dollar one spends with their debit card, they earn a small percentage back. Credit cards also have better protection against fraud: users can refute charges to their account that they did not authorize. In contrast, if someone steals and uses one’s debit card, the money disappears from their account, much like stolen cash.
Furthermore, individuals can build their credit score by paying their monthly credit card bills on time. In the United States, having a high credit score is useful for receiving approval for a loan or renting/buying property.
On the other hand, failing to pay credit card bills on time will not only reduce one’s credit score but will force them to pay high-interest rates. So, when using a credit card, try to avoid accumulating a balance (the amount of money you owe) that you won’t be able to pay by the end of the billing period. In other words, spend responsibly!
Pros:
Widely accepted
Can help cover an emergency expense
Strong fraud protection
Can build credit
Cashback
Cons:
High-interest rates on balances left unpaid
Fees on late payments
Overutilization can hurt your credit score
Cryptocurrency:
Cryptocurrency is a completely different form of currency that only exists digitally, meaning it has no physical bills or coins. Cryptocurrencies are not regulated by a central entity (as traditional dollars are regulated by the Federal Reserve), which makes them part of a decentralized financial system. All balances are kept on a public “ledger,” or encrypted system of records that documents the transactions and balances of each participant.
Over 1,500 types of cryptocurrency exist, the most well-known form being Bitcoin. All Bitcoin transactions are verified through the blockchain, a specific ledger. An important item to note is that the value of Bitcoin is very volatile.
More info about the blockchain can be found here.
For example:
On February 21st, 2021, the value of Bitcoin dropped from $58,000 to $47,700 in a span of 19 hours.
Pros:
Transaction speed
High level of security: the blockchain verifies every transaction that occurs (read that blockchain article)
Privacy: Personal information like name and address aren’t shared
Cons:
Highly volatile value
Difficult to understand
Unregulated by the government
All of these payment types have their uses in our day-to-day lives. Whether it be writing a check to pay a babysitter, using cash to buy groceries, or using your credit card to help cover an unexpected expense.