Using PayPal? 10 tips to stay safe

Since it's so popular, it's also a playground for thieves

By Minda Zetlin

Just how safe is the online payment system PayPal?

More than 153 million people worldwide use it for online purchases and sales. If you're one of them, you know that the service is hugely convenient. But does it offer the same protections as a credit card?

The answer is a qualified yes. PayPal has powerful fraud and consumer protections in place. "In a recent PayPal transaction, I signed in from a location where I don't usually do business," says Robert Siciliano, identity theft expert and consultant with McAfee. "They required me to receive a phone call and respond to prompts. That was an extra layer of protection my bank doesn't provide."

"PayPal covers consumers when they don't receive an item or when the item is significantly different from what the merchant described," says Wendy Roberts, who works on consumer protections for PayPal. "PayPal customers are not liable for fraudulent charges to their PayPal accounts." Until recently, customer protections extended only to eBay users (eBay is PayPal's parent company). As of Nov. 1, 2010, they apply to everyone.

However, there's a downside to PayPal's being the world's most recognizable online payment system: It's also the biggest target. "The brand name is often taken advantage of by phishers," says John Breyault, director of the National Consumers League's Fraud Center. ("Phishing" is the practice of using fraud and/or malicious software to obtain customers' usernames and passwords in order to gain access to their accounts.)

Fortunately, you can maximize safety and consumer protections on PayPal with a few simple steps.

Why: Someone who gains fraudulent access to your PayPal account could wind up cleaning out your bank account as well. This happened to Nicole Dunn, a creative television producer, who purchased an item worth about $100. Soon after, her debit card was declined at a gas station, even though she had just deposited her paycheck. "It was one of those heart attack moments," she says. "I looked at my bank account and it was overdrawn by $3,000." PayPal refunded the money, but wound up crediting the wrong amount and then demanded a $450 repayment, Dunn says. The experience was enough of a hassle that she now avoids using PayPal -- though she notes that this decision has made eBay shopping all but impossible.

Why: PayPal will cover you if you purchase an item that doesn't arrive or isn't what you expected, but by using a credit card to fund PayPal purchases, you gain an extra layer of protection because you can dispute the charge through your credit card company as well. PayPal's policy gives you up to 45 days to start a dispute where most credit card companies give you up to 60 days. "The customer still has a recourse with the credit card company after PayPal's decision has been made," Roberts says.

3. Never click on links in e-mails from PayPal.

Why: They might not really be from PayPal. The most common theft technique involves stealing passwords by sending "spoof" e-mails that appear to come from PayPal, but link to dummy sites -- complete with the PayPal logo -- where users unwittingly type in their info. "Instead, go to your PayPal account yourself, log in and look there for any communications," Siciliano says.

4. Watch your balance carefully.

Why: Thieves will typically begin draining an account with a series of small withdrawals -- as little as $5 -- hoping the user won't notice. "I was going through some transactions, and there were some little odd ones, about $5 or $10 every two or three days," says Anissa Wardell, owner of The Publicists Assistant. "We watched it for four or five days, and it kept happening, so I called PayPal." It turned out the payments appeared to be going to a small grocery store in the United Kingdom -- where Wardell had never been. PayPal helped Wardell finish off her outstanding transactions and close the account, and also refunded the missing money. "The PayPal rep said that they usually take lower amounts, but then it will spiral into the hundreds," she says.

5. Use verified merchants, and consider getting verified yourself.

Why: Practically anyone with an e-mail address can open a PayPal account, but PayPal will "verify" users and merchants who provide additional information. While it does not guarantee that someone is legit, verification adds evidence of legitimacy. In the United States, you get verified by linking PayPal to a bank account, or (if you're following our advice against doing this) by applying for and obtaining a PayPal credit card.

1. Make sure buyers get no surprises.

Why: "PayPal covers consumers when they don't receive an item, or when it is significantly different from what the merchant described," Roberts says. This means a disgruntled customer can often get PayPal to issue a refund, which will be withdrawn from the seller's account. To keep this from happening, Roberts advises, "Be clear and detailed in describing the item you're selling. Detail every scratch or flaw. Provide lots of close-up pictures." After the transaction, she also recommends sending a follow-up note to make sure the item arrived as expected.

2. Ship only to confirmed addresses -- with tracking.

Why: PayPal will confirm purchasers' addresses, either because their credit card is billed to the same address or through other means of verification. This reduces your risk of having items purchased with a stolen credit card. In addition, Roberts advises shipping only to addresses entered on your transaction's details page.

3. Don't use shipping labels that are sent or e-mailed to you.

Why: "This is a common trick some fraudsters use," Roberts says. "Ship using one of the major postal services and make sure to get an online tracking number or proof of delivery. For items worth more than $250, require signature confirmation."

4. Watch out for "red flag" transactions.

Why: Certain types of requests raise the likelihood that you're dealing with a fraudulent buyer. "Be aware when you get requests for rush shipment, or if you're getting partial payments from multiple accounts," Breyault says. In general, he adds, be extra cautious when selling high-dollar items, which are a frequent target.

5. Keep all records of the sale and shipment.

Why: PayPal allows buyers to dispute transactions for 45 days, and they may have up to six months to dispute a charge with a credit card company. In addition, for physical items that are shipped to buyers, PayPal offers a seller protection policy, Roberts says. "That covers sellers if buyers claim they didn't receive an item, and the seller can prove it was shipped. Seller protection also protects sellers from fraudulent or unauthorized payments." To qualify, you must ship to the address on the transaction details page, and be able to respond quickly to requests for documentation.

See related: How to dispute a credit card bill with a merchant, How to check for, fix ID theft or fraud, Credit card fraud victims more likely to recover losses

Published: October 28, 2010

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