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How Does the Chip in My Credit Card Work?

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Over the last decade, credit card issuers around the world have transitioned from credit cards with a magnetic strip to EMV® chip credit cards. The main reason for the change is security; a chip credit card is less prone to in-person fraud than cards with a magnetic strip.

Here's a rundown of how chip-enabled cards make your point-of-sale transactions safer, as well as why you still need to take precautions to safeguard your personal information.

Magnetic strip vs. chip credit cards

The key problem with magnetic strips on credit cards is that they contain all of the cardholder information that would be necessary to make a purchase -- or to manufacture a counterfeit card. And with today's technology, that data can be stolen with simple phone apps or dime-a-dozen strip readers.

So how does the chip in your credit card work to stymie would-be card thieves? Without getting too technical, here's the basic difference: While the data in a card's magnetic strip stays the same over time, the chip in your card generates a unique code for each transaction that can only be used once.

In other words, each time you insert your chip credit card into a reader -- or use its contactless payment function -- the computer in the chip generates a new transaction code for that purchase. This means that even if a thief managed to copy your credit card chip information for a specific point-of-sale (POS) transaction, they would be unable to do anything with it.

The same point holds true for data breaches at retailers. Your credit card chip won't stop a data thief from stealing transaction data or records for in-person purchases, but it does make the data itself far less valuable and more difficult to use.

Does your chip credit card need a signature or a PIN?

For decades, cardholders who used magstripe credit cards were required to sign for every purchase. That signature was then compared by the business with the signature on the back of your credit card. After the transition to chip credit cards, however, signatures became less common.

These days, it's become somewhat rare to be asked to sign a receipt if you make a purchase with a chip credit card, though it does happen (primarily at restaurants). Most of the time, you'll insert your chip card into the reader, wait a few seconds, then remove your card when prompted (often by an abrasive alert designed to ensure you don't walk away without your card).

However, the chip-and-signature approach is only used in the U.S. If you travel abroad, your signature-based card may raise some eyebrows -- or outright not work at all.

That's because many other countries, especially in Europe, operate on a chip-and-PIN system that uses both an EMV® credit card chip and a four-digit PIN for large purchases. For smaller purchases, contactless payments are common and won't require a PIN.

Chip cards don't fix everything

To be perfectly clear, EMV® card technology does not make you immune to fraud. For starters, someone who steals your physical card can still use it to make purchases anywhere that doesn't check signatures or ID (which, let's face it, is most places nowadays).

Furthermore, your credit card chip does nothing to solve the problem of digital card fraud. It's still relatively easy for a thief to use your stolen credit card information online. So, while chip credit cards have helped reduce in-person card fraud, online credit card fraud has steadily increased.

Chip card technology also doesn't stop various credit card scams, such as thieves who trick cardholders into revealing account information like their card number or password. Nor does it stop accounts from being opened up in consumers' names without their knowledge.

A step in the right direction

By now, most, if not all, of your credit cards probably use chip technology and the majority of retailers will have a chip card reader. But while a chip credit card can certainly make your credit information safer, it's not 100% safe.

Even if you have a chip credit card, it's still extremely important to keep your personal information secure and monitor your credit reports for any suspicious activity to avoid credit card fraud.

If you do find yourself a victim of credit card fraud, be sure to report it to your issuer right away. On the bright side, unauthorized credit card purchases won't bankrupt you; by law, you're only liable for up to $50 in fraudulent credit card purchases, and most issuers won't charge you a dime.

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