How Credit Cards Work

Your card has a magstripe on the back and a place for your all-important signature.

Illustration by Rosaleah Rautert

The Stripe on a Credit Card

The stripe on the back of a credit card is a magnetic stripe, often called a magstripe. The magstripe is made up of tiny iron-based magnetic particles in a plastic-like film. Each particle is really a tiny bar magnet about 20-millionths of an inch long.

The magstripe can be "written" because the tiny bar magnets can be magnetized in either a north or south pole direction. The magstripe on the back of the card is very similar to a piece of cassette tape (see How Cassette Tapes Work for details).

A magstripe reader (you may have seen one hooked to someone's PC at a bazaar or fair) can understand the information on the three-track stripe. If the ATM isn't accepting your card, your problem is probably either:

  • A dirty or scratched magstripe
  • An erased magstripe (The most common causes for erased magstripes are exposure to magnets, like the small ones used to hold notes and pictures on the refrigerator, and exposure to a store's electronic article surveillance (EAS) tag demagnetizer.)

There are three tracks on the magstripe. Each track is about one-tenth of an inch wide. The ISO/IEC standard 7811, which is used by banks, specifies:

  • Track one is 210 bits per inch (bpi), and holds 79 6-bit plus parity bit read-only characters.
  • Track two is 75 bpi, and holds 40 4-bit plus parity bit characters.
  • Track three is 210 bpi, and holds 107 4-bit plus parity bit characters.

Your credit card typically uses only tracks one and two. Track three is a read/write track (which includes an encrypted PIN, country code, currency units and amount authorized), but its usage is not standardized among banks.

The information on track one is contained in two formats: A, which is reserved for proprietary use of the card issuer, and B, which includes the following:

  • Start sentinel - one character
  • Format code="B" - one character (alpha only)
  • Primary account number - up to 19 characters
  • Separator - one character
  • Country code - three characters
  • Name - two to 26 characters
  • Separator - one character
  • Expiration date or separator - four characters or one character
  • Discretionary data - enough characters to fill out maximum record length (79 characters total)
  • End sentinel - one character
  • Longitudinal redundancy check (LRC) - one character LRC is a form of computed check character.

The format for track two, developed by the banking industry, is as follows:

  • Start sentinel - one character
  • Primary account number - up to 19 characters
  • Separator - one character
  • Country code - three characters
  • Expiration date or separator - four characters or one character
  • Discretionary data - enough characters to fill out maximum record length (40 characters total)
  • LRC - one character

For more information on track format, see ISO Magnetic Stripe Card Standards.

There are three basic methods for determining whether your credit card will pay for what you're charging:

  • Merchants with few transactions each month do voice authentication using a touch-tone phone.
  • Electronic data capture (EDC) magstripe-card swipe terminals are becoming more common -- so is swiping your own card at the checkout.
  • Virtual terminals on the Internet

This is how it works: After you or the cashier swipes your credit card through a reader, the EDC software at the point-of-sale (POS) terminal dials a stored telephone number (using a modem) to call an acquirer. An acquirer is an organization that collects credit-authentication requests from merchants and provides the merchants with a payment guarantee.

When the acquirer company gets the credit-card authentication request, it checks the transaction for validity and the record on the magstripe for:

  • Merchant ID
  • Valid card number
  • Expiration date
  • Credit-card limit
  • Card usage

Single dial-up transactions are processed at 1,200 to 2,400 bits per second (bps), while direct Internet attachment uses much higher speeds via this protocol. In this system, the cardholder enters a personal identification number (PIN) using a keypad.

The PIN is not on the card -- it is encrypted (hidden in code) in a database. (For example, before you get cash from an ATM, the ATM encrypts the PIN and sends it to the database to see if there is a match.) The PIN can be either in the bank's computers in an encrypted form (as a cipher) or encrypted on the card itself. The transformation used in this type of cryptography is called one-way. This means that it's easy to compute a cipher given the bank's key and the customer's PIN, but not computationally feasible to obtain the plain-text PIN from the cipher, even if the key is known. This feature was designed to protect the cardholder from being impersonated by someone who has access to the bank's computer files.

Likewise, the communications between the ATM and the bank's central computer are encrypted to prevent would-be thieves from tapping into the phone lines, recording the signals sent to the ATM to authorize the dispensing of cash and then feeding the same signals to the ATM to trick it into unauthorized dispensing of cash.

If this isn't enough protection to ease your mind, there are now cards that utilize even more security measures than your conventional credit card: Smart Cards.