How Do Chip Credit Cards Work – Best Guide

A credit card allows one to borrow finances from their card issuer. It resembles a debit card since it may be rectangular, plastic, or metal. The cards are critical since they can help you when you do not have money. You need to use the card to pay for your goods and services and repay your debt later. But how do chip credit cards work? We shall look at that later.

You might be wondering what a card chip is. To bring you into the limelight, I will define what a chip is. A chip card is a plastic debit or credit card containing an embedded microchip and a traditional magnetic stripe. It encrypts card owner details to increase data security when withdrawing money at automated teller machines (ATMs) and doing your transactions at stores, restaurants, groceries, and terminals, among others.

We all understand that money issues are a bit complicated, and failure to lay down the proper mechanisms can lead to the loss of money. Card manufacturers incorporate all those security measures to prevent losing your money online. The only risk remains on the card number, expiry dates, and the security code since anybody can use those details to purchase goods and services online. You do not need a PIN for online transactions, which poses a significant threat, especially if you lose the card.

How a credit card works?

If you hear about a credit card today, you must be wondering how the card works. The operation of a credit card is not that difficult. You usually get a borrowing limit called the credit limit when you get a credit card. Beyond the amount, you cannot borrow more money.  

After hitting the borrowing limit, you cannot borrow more money until you repay your debt. It is also detrimental to spend all your credit limit. It shows that you are a risky borrower who can easily default. That lowers your credit scores in a big way. Credit card debt repayment is usually at the end of the month.

Credit cards give recurring kinds of credit since you can repeatedly borrow as long as you repay your debt accordingly. Your issuer reports your card usage to the credit bureaus as you use your card. The bureaus then use the details to calculate your FICO scores and compile a credit report.

How can you get a credit card?

how do chip credit cards work

Getting a credit card may not be as easy as with debit cards. First of all, you must be at least 18 years old to get a debit card. With debit cards, teens and school-going children can get the cards to spend on their needs at school because you only spend what is on your card and no borrowing. However, since credit cards require borrowing, kids may borrow a lot of money that can be costly to parents and guardians.

Before getting a credit card, one must know why one needs a credit card. You might be looking for a credit card to build your scores or use for your day-to-day transactions. You can have an unsecured credit card if you want a credit card for your transactions. You require FICO scores to get such cards. Most cards require fair to excellent credit scores. However, you can get instant credit card approval for bad credit with no deposit from some institutions. However, such cards are not financially friendly due to the high-interest rates they charge and the low credit limit you get.

Credit cards are also for rebuilding credit, whereby you can build your scores from scratch. These are the secured ones and require you to deposit some money to get them. The amount you deposit determines your borrowing limit. For example, if you deposit $50, your credit limit may be $50 or slightly below the deposit amount. You usually get secured cards if you are building your scores from scratch. However, someone with poor scores can also use a secured card to build their cores.

After choosing the right card, you can proceed to apply online or at a branch. Online application is convenient as you receive your card at your place. Some financial companies require you to have a checking account to apply for a credit card. Others allow you to apply for the card specifically without the need for a checking account. You require your identification document, Social Security Number, email address, phone number, and physical address when applying for the card. Upon getting it, you should activate it for use.

How do chip credit cards work?

As I mentioned earlier, the chip on the card encrypts data about the card user. That adds security to the card. The chip generates a specific code for every transaction that is only useful once.

To make you understand correctly, every time you insert your card into a reader and use its contactless payment option, the system in the chip generates a new transaction code for the purchase made. Even if a fraudster copied your credit card chip details for a specific point-of-sale (POS) transaction, they cannot do anything with the details they got. Therefore, the data is useless to the thief as they cannot use it anywhere.

However, despite providing security when purchasing at various places, the chip does not offer security if it lands in the hands of a fraudster. The details such as the card number, the security code, the CVV, and the expiry code are still visible. The details are important for online purchases. You do not need a PIN to make transactions online, as I mentioned earlier. 

Some financial companies send an OTP on your registered mobile phone number every time you purchase to authorize a transaction to curb online card usage fraud. However, that is not always the case.

Are the card chips secured compared to the magnetic stripe ones?

Before the chip cards came into existence, financial companies used to issue payment cards with magnetic stripes. The magnetic stripes on credit cards contain all the cardholder information necessary to purchase. That makes the card vulnerable to data theft when paying at various places. Today’s technology can allow data theft through mobile payment apps and stripe readers.

Therefore, the chip cards are secure compared to the magnetic stripe cards. As mentioned above, chip cards generate unique codes for every transaction. Thus if a fraudster steals the data at one point during a purchase, they cannot use it anywhere to defraud the card owner.

How are chip card transactions processed?

Chip cards work with EMV compliant devices with chip-and-PIN standards. When making a transaction, you insert your card into the terminal of the card reader machine. The chip and the machine communicate to authenticate your transaction.

You should follow the on-screen instructions to validate your transaction further. The process varies depending on the verification method specified by the card-issuing financial company. Chip-and-PIN transactions are replacing the chip-and-signature systems whereby you should enter a PIN to complete a given transaction.

Once you complete your authentication steps at the terminal, the online processing of the transaction begins. The card issuer may carry out additional authentication and other fraud filters before returning an approval or decline code to the EMV terminal.

Can chip-and-PIN cards work offline?

Chip-and-PIN cards can work offline since chip cards operate dynamically. However, a network connection is essential. The importance of allowing offline transactions is to enable businesses to run all the time. If the cards operate online only, there can be losses where customers cannot purchase goods and services.

Two methods allow the cards to work offline. We have Static Data Authentication (SDA) plus Dynamic Data Authentication (DDA) that allows Payment data authentication between the card and the terminal instead of communicating with the issuing institution.

What are the various kinds of chip credit cards?

We have two types of credit cards that have chip technology. They include secured and unsecured credit cards. You can have a secured credit card for rebuilding your credit. The card does not require any credit scores other than the security deposit. As I mentioned earlier, your security deposit determines your borrowing limit. Once you gain favorable scores, you can proceed to apply for an unsecured credit card.

Unsecured credit cards require credit scores to get them. There are unsecured credit cards for bad, fair, good, and excellent scores. The higher your scores, the higher your borrowing limit. FICO scores usually express your creditworthiness. In short, they show your ability to repay your loans. The scores range from 300 to 850, with 300 the lowest score count and 850 the highest.

What to do upon losing your card?

No card is safe in the hands of the wrong person. Therefore, if you lose your card, you should report it immediately to the card issuer to disable it. Some issuers also allow you to disable your card online through your mobile app. That way, you prevent card usage by fraudsters.

Bottom line

Credit cards allow one to borrow finances from the card issuer. You can have a secured or unsecured credit card for your transaction activities. The secured cards are for building scores, while the unsecured cards mainly allow you to borrow money from the card issuer when the need arises. Nowadays, we have chip cards that are more secure than magnetic stripe cards since they encrypt data for security issues.