Why there's a chip in your new credit and debit cards

If you haven't noticed, there's something strange going on with your credit cards and debit cards. You might have suddenly had your bank re-issue every single one, and the new ones have a shiny little square. And when you use them at certain stores, you have to insert your card into the reader instead of swiping it.

If that hasn't happened to you yet, it will. Those little shiny squares are called EMV chips

and they're already on 120 million cards in the United States. The deadline for most retailers

and card issuers to become compliant, as established by MasterCard, Visa, Discover and

American Express, was Oct. 1, so you're going to start seeing a lot more of them.

In fact, some 600 million EMV cards will be in circulation in the U.S. by the end of this year,

according to the Smart Card Alliance. These chips are already commonplace in most of the

world, with big-name financial institutions behind them, including American Express,

Discover, JCB, MasterCard, UnionPay and Visa. (EMV stands for Europay, MasterCard,

Visa.)

These companies have a lot of incentive to do a better job securing your card transactions:

money. In 2013 alone, criminals stole $2 billion in the United States by duplicating the

information on the standard magnetic strip found on the back of every card. That was a

100% increase from the year before, according to research firm Aite Group.

Plus, some of the worst credit card crimes in recent years exploited the payment machines

where you swipe your card. You remember when Target was hacked in 2013? Criminals

hacked the in-store credit card readers to steal information from up to 70 million people.

Last year, The Home Depot reported that criminals used that same method over a five

month stretch to compromise credit card information from 56 million people.

EMV chips are intended to make it a lot tougher for criminals to steal your information, and

to exploit retailers' payment systems. Here's how it works, and why it still isn't as safe as you

might hope.

EMV SECURITY

DRAWBACKS

The EMV chip in your card protects you from criminals in a number of ways. If you've tried

swiping a credit or debit card with an EMV chip in it, you know that it doesn't work with

standard credit card readers, which read the magnetic stripe. The chip is different from the

stripe, and that includes the way your information is stored on them.

With a magnetic stripe, all your information is coded on it. If a counterfeiter steals it and

copies it, he can use your information over and over. However, the EMV chip doesn't store

your information. Instead, the computer chip creates a unique transaction ID each time you

use it. It uses encryption to securely hide your personal information, so even if hackers get

the ID, it's worthless to them.

Second, in most of the world, credit card issuers require that people also input a PIN. That's

commonly referred to as the chip-and-PINmethod. It's a great way for you to keep your

cards, and information safe. When you use chip-and-PIN, the EMV chip creates a unique ID

for that transaction. On top of that, you have to unlock your card with your PIN. Even if a

criminal did get his hands on your card, he most likely would have a really tough time getting

past your PIN.

Note: Keep reading to find out why the chip-and-PIN method may not do you much good in

the United States.

Third, some EMV cards use something called a near field communication (NFC) to make

financial transactions. You wave your card past an NFC reader, or insert it into one and your

money is transferred using radio wave technology from your card to the retailer. In order for

criminals to steal your information, they'd literally have to be within a few inches of you, and

have an NFC reader with them. That's doable, but not something everyday criminals will

take on. (Check out the Komando Shop for wallets that protect your ID from this kind of

theft.)

While credit cards and debit cards with EMV chips will do a better job of protecting your

information from theft, EMV for the moment is an imperfect system. Or, more precisely, it's

an imperfectly executed system. Here's why:

1. While the Oct. 1 deadline for retailers and credit card issuers to transition over to EMV

cards has already come and gone, most still aren't compliant. These cards will become

more commonplace over the next two years, but that's a long time to leave customers

exposed. In fact, automated gasoline pumps, one of the easiest places for thieves to swipe

card data, don't have to be compliant until 2017. Bonus: Do you know the three places

where using a card puts you at most risk? Find out here.

2. The chip-and-PIN method, where the EMV chip creates unique transaction codes and

you also input a PIN to unlock your card, isn't really going to be used in the United States.

At least not as widely as it is elsewhere in the world. Here, you will most likely use your EMV

cards by inserting them into a reader or waving them over one, and then providing

a signature instead of a PIN. That means the EMV cards will be safer than current cards

with magnetic stripes, but not as safe as they can be.

3. If you travel overseas, where the chip-and-PIN method is used, you may run into some

problems if you don't have a PIN. Plus, in the U.S., there will be a transition period where

cards have both a magnetic stripe (which will eventually go away) and the EMV chip. You

may find EMV readers in some countries may not read a card with both a stripe and a chip.

4. Criminals are clever, but you already knew that. If they steal your EMV-equipped card and

use it to make an online purchase or place an order over the phone, they don't need to scan

your EMV chip. It's called a card not present, or CNP transaction. It's a growing problem in

countries that use the chip-and-PIN method.

Despite this, moving forward with EMV cards is a definite plus. It's about time cardholders

and retailers took security seriously.

Have you had your cards replaced with EMV cards, or seen the new readers at retailers?

Let us know in the comments your experience with them and if they make you feel safer.