How to avoid 3 expensive mistakes on P2P apps

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If you’ve ever used a peer-to-peer payment app such as Cash App, Paypal, or Venmo, you’ve more than likely had that one nervy moment: “Did I just send money to the wrong person?”

And for nearly one in four people, the answer, on at least one occasion, has been “Yup — oops!”

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It’s hardly a shocker given how ubiquitous P2P payment apps have become, with 84% of consumers saying they’ve used them to send or receive money, according to a recent survey from LendingTree. The survey found that 23% of app users have sent payments to the wrong person, and that 15% have lost money as the result of a scam.  

More encouragingly, perhaps, 69% of P2P app users say they understand that they’re on the hook for the money if they mistakenly send it where it doesn’t belong. “This is a good thing. You can’t face a problem if you don’t know that it’s there,” says Matt Schulz, chief credit analyst at Lending Tree. “But on the flip side, that means about one in three people are using these tools where ridiculous amounts of money flow through every day and don’t understand some of what makes them unsafe.”

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Read on for what experts say are three common pitfalls among users of P2P payment apps, and how you can keep them from hurting your finances.

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Mistake 1: Sending money unprotected

Some folks use P2P apps as a checking account and a credit card in one — they hold a cash balance that’s ready and available to be disbursed when needed. But in doing so, they get the protections of neither.

While debit and credit cards both offer some protections against erroneous or fraudulent charges, many P2P platforms don’t, unless you’re transacting via a co-called “goods and services” option, for which the likes of Venmo and PayPal charge sellers small percentage of the purchase price. As a buyer, you can opt in to send a payment that way.

If you pay a stranger for a good or service through a free “friends and family” style payment, you’ll likely be out of luck if you make a P2P payment to the wrong person or to someone who ultimately doesn’t give you what you paid them for.

Video by Lauren Shamo

“The fact that sending money to the wrong person is not like getting a fraudulent credit card charge reversed is a significant thing,” says Schulz. “There’s real risk — especially if you’re someone on a budget or living paycheck to paycheck.”

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That’s why it pays to carefully scrutinize who you’re sending money to says Schulz. And if you’re paying someone for a product or service that you expect to receive later, be aware that someone could potentially take your money and run if you don’t go the “goods and services” route if it’s available. “In those cases, I may opt for a credit card rather than a P2P payment,” he adds.

Mistake 2: Opening yourself up to scams

Where there is money to be had — especially instantly delivered to a mobile device — scammers abound. One common trick sees scammers buying big ticket items with a P2P app linked to a stolen credit card. If you’re selling an item, that could mean once the fraud is discovered, you’ll be out your item and the money.

In another scheme, a scammer will tell you they overpaid you by mistake (“I bought your used TV for $200 but accidentally paid you $2,000,” for instance) and ask for the item you’re selling along with a refund of their “overpayment.” Should you send the money in these cases, you’ll experience a similar effect: they’ll take your money and your TV and run.

Video by Lauren Shamo

To keep from falling into these and other common  traps, avoid making P2P transactions with people you don’t know personally, and don’t put your payment information on social media sites, says Schulz. “It’s not like giving our your Social, but that kind of information is like gold to fraudsters,” he says. “The last thing people should do is make bad guys’ jobs easier than they already are.”

On this front, the Better Business Bureau also suggests installing extra security measures, such as two-factor authentication, around your mobile payments and to link your P2P payment account, where possible, with a credit card, which could offer more robust fraud protections.

Mistake 3: Relying on friends to cover big expenses

One of the places P2P apps have revolutionized how people spend money: the dinner table. For many restaurant diners, gone are the days of putting 8 cards onto a table or asking for a pen to work out who owes what. Instead, one person picks up the bill and charges their friends accordingly.

In a recent survey of its members, online bank SoFi found that 43% offer to put shared expenses, including meals, drinks, and tickets, on their card and have people pay them back later. For people with a good handle on their budget and disciplined spending habits, this move can be a win-win. Your friends don’t have to fuss with figuring out how to split the check, and you pick up more cash back or rewards points for using your credit card.

Video by Mariam Abdallah

But amid rising inflation, you’d be wise to be careful with this strategy and the company you employ it in, says Brian Walsh, a financial planner at SoFi. “If you have the money to pay it off and can handle it without your friends paying you right away, it’s perfectly fine,” he says. “But if you put something on your card and it’s stressing you out and you end up hounding your friends, it may not be worth it.”

And even if the points look enticing, you’ll end up in the black if you don’t get paid back in time for your card’s due date and you end up running a balance. “It really is about how big the purchase is,” Walsh says. “You have to ask yourself if you can actually handle it.”

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