3 things you should know about apps that let you pay your friends back

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Person to person—or P2P—payment apps allow users to quickly and easily transfer money from their bank account or credit card to another person’s account through the internet or a mobile phone. And according to a new NerdWallet survey, most Americans (63%) would be willing to use one. Here are three ways to make the most of a P2P payment app.

Use them to easily track spending

A little fewer than half of Americans (44%) in the survey conducted for NerdWallet by Harris Poll said using a P2P payment app—such as Venmo, PayPal or Square Cash—would make it more difficult for them to accurately monitor their spending. Adding a new financial account to the mix might sound like a hassle, but replacing cash payments with P2P transfers can make it easier to know where your money has gone.

Let’s say you go out to dinner with friends. One friend puts the entire check on her credit card and asks the rest of you to pay her back. If you pay with cash, you might forget how you spent that money. But if you use a P2P payment app, you’ll know that you sent it to your friend for dinner. Then you can factor the amount into your entertainment budget and keep your spending on track.

When it comes to sending money to friends and family, P2P transfers are often easier — and easier to track — than cash payments. But be careful when paying strangers — for items purchased on Craigslist or eBay, for example. Don’t send money to someone you don’t know for an item you haven’t yet received.

Save money by linking a bank account

More than half of Americans surveyed (56%) who currently use a P2P payment app link it to a credit card. This isn’t necessarily a bad idea, because credit cards are a secure form of payment—but it can be expensive. Many P2P apps charge fees for paying with a credit card, but not for paying with a checking or savings account.

On top of that, some credit card issuers consider P2P transfers cash advances, which are expensive. Balance transfer fees typically cost between 2% and 5% of the transfer, and the annual percentage rate is several percentage points higher than one for a regular purchase. Plus, interest starts accruing on cash advances immediately. Unlike regular purchases, there’s no grace period.

Use a checking or savings account as your primary P2P payment source, rather than a credit card, to avoid extra costs. And if you do pay with a credit card, know the app’s and issuer’s policies on fees and interest.

Transfer balances to a bank account to keep them safer

More than half of Americans surveyed (52%) who currently use a P2P payment app cash out immediately after receiving a payment, but 13% maintain an average balance of more than $500. Apps shield your financial information from hackers and have policies that protect your cash, as do state laws, but the FDIC insures bank accounts for up to $250,000 — so it’s still smarter to hold money in your bank account than an app.

Check out the full study for tips on using P2P transfers securely and cost-effectively.

Erin El Issa is a staff writer at NerdWallet, a personal finance website. Email: erin@nerdwallet.com. Twitter: @Erin_El_Issa.

The article Ditching Cash for P2P Payment Apps? 3 Things to Know originally appeared on NerdWallet.

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