Payment Apps Are Great -- but Make Sure to Avoid This Pitfall

Payment apps have been around for a while, and these days, consumers seem more comfortable using them. Recent research from The Ascent found that most Americans trust digital payment apps at least as much as they trust traditional payment methods that include cash, debit, and credit cards. And 58% of Americans say they use payment apps more than twice a week.

But if you're going to use payments apps like PayPal and Venmo, you'll want to avoid one big trap that could cost you money.

Don't give up interest income

Payment apps can be extremely convenient. You can link them to your checking account and use them to do everything from reimburse friends for purchases to pay for items online and in stores.

That said, you'll want to be careful not to leave too much money sitting around in your payment apps. Doing so could mean losing out on interest.

Let's say you dish out the money for a holiday gift for your grandfather, and all of your siblings and cousins pay you back for their share by sending you Venmo payments, leaving you with a $500 Venmo balance. Money sitting in a Venmo account doesn't earn interest, so if you keep your $500 there without transferring it over to a savings account, you could end up losing out.

Let's say your savings account is paying 4% interest, and you leave that $500 in your Venmo account for three months before transferring it over. That means you've given up $5 in interest. Now that may not seem like a life-changing amount of money. But what if you keep leaving larger balances in your Venmo account for months at a time? The interest income you lose could really add up.

And besides, let's say we are only talking about $5 in lost interest. That's money that could buy you a latte at your favorite coffee shop. Why give it up?

It's worth noting that some payment apps may give you an opportunity to earn interest on your money. PayPal, for example, has an option called PayPal Savings, where you can open a deposit account to earn interest on your money. But you'll have to create an account to earn interest. Your PayPal balance won't just automatically start accruing it.

Manage your money carefully

When you use payment apps, it can be easy to forget that your money is there. So if you're going to get paid via these apps, you may want to get into the habit of transferring money out of them once it arrives and making sure it hits your bank account instead.

Along these lines, you may be inclined to treat a Venmo or PayPal balance as "not real money" that you might as well spend on just anything. If you take that attitude, you might end up wasting a lot of money during the year. So be sure to treat that money as "real money" and make certain you're keeping solid tabs on it.