Everything you need to know about chip cards

 

If you’ve received a new credit card in the past year or so, you’re probably still adjusting to life with a chip card (sometimes known as a smart card). I was recently purchasing dog food and the clerk had to remind me to take my card back out of the reader before leaving.

“We’ve already had three people forget their credit cards since we put the new machine in,” he told me.

That’s not so good, but chip cards, we’re told, are here to make our transactions safer. So how does that work exactly?

The old system

To understand why the new chip cards are more secure, we should first look back at the old design.

The black strip on the back of your credit card is magnetic. It contains coded information related to your account. When you swipe the card, the reader connects the coded information on your card with your account and the transaction is processed (or not, as it may be).

The information in that magnetic strip doesn’t change. It’s essentially a coded book. So when the card is read, all of your account information is made available. This is a problem in a couple of major ways.

First, if someone makes a copy of your card using a skimmer, they’ll have everything they need to access your account and potentially steal your identity.

Second, because stores access your full account information when processing a transaction, if there’s a data breach, those thieves will also be able to get into your account.

The new system

The reason these new cards are called chip cards is because the centerpiece is a computer chip. This computer chip represents a massive change in the way data is shared through the card.

Rather than sending all of your account information, the chip creates a unique, one-time transaction code. That code is specific to just that one purchase. So if there were a data breach at a store where you've shopped, rather than stealing all of your account information, the thieves would only be able to steal the unique transaction codes related to specific purchases. And because those codes can only be used once, the stolen data would essentially be worthless.

This also explains why the new process is a little bit longer than the old one. When you “dip” your chip card it begins a conversation of sorts with the issuer, verifying that the funds are available and creating the unique transaction code to complete the process.

Why is this happening?

Credit card fraud is massively expensive. Historically, those costs have fallen back on the card issuer, but that’s no longer the case. Beginning in October 2015, liability is now directed towards whichever party is the least compliant with these new fraud protection measures.

In other words, if I have a chip card, but the store I’m shopping in isn’t equipped to process chip cards, the store would be liable if my data is breached as a result. Similarly, if a store has chip readers, but the issuer hasn’t provided consumers with chip cards, then any resulting losses would fall to the issuer.

In this way all parties are motivated to integrate this new technology and keep our data safe. It may take a little getting used to, but chip cards – and the added fraud protection they bring – are here to stay.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.