Social media was once celebrated as a revolutionary space for constructive connection. While it can foster community, amplify marginalised voices and expose users to diverse perspectives, these platforms are also implicated in the rise of polarisation, intergroup conflict and extremist movements. This review examines how social media use can be both beneficial and detrimental, with a focus on the key underlying psychological mechanisms that explain, in part, the effect of social media on inter- and intra-group relations. Drawing on theories of social identity, confirmation bias and moral psychology, we argue that social media platform design interacts with core psychological tendencies in ways that are both constructive and destructive for social groups and society. We conclude by offering actionable insights for platforms, practitioners and users, showing how psychological knowledge can inform interventions aimed at reducing the destructive outcomes of social media—promoting more positive social change in the digital age.