Ever since the massive credit-card breach at Target and other major retailers, there’s been an outcry for more secure credit cards. Both credit-card issuers and retailers now seem ready to take that step and transition from magnetic-stripe credit cards to EMV-enabled credit cards, also known as smart cards.

EMV (Europay MasterCard Visa) is a set of global standards for smart cards. These standards ensure that EMV credit cards and payment terminals work together successfully.

What Exactly Is a Smart Card?

EMV cards are called “smart cards” because they have an integrated circuit chip (ICC) embedded in them. They have been used in other parts of the world, such as Europe and Asia, for a very long time to reduce fraud. In Europe, many EMV cards are called "chip and PIN" because they require a PIN to be used. This is similar to the way your debit card works when you use your PIN. Chip-and-signature cards are another type of smart card, which only require a signature. They are not as secure as the chip and PIN but are still considered better than plain magnetic-stripe cards. We’re likely to see both types of cards in the U.S. over the next few years.

If other countries have had EMV cards for some time, why did the U.S. just recently get into the act? Because the transition from our magnetic-stripe cards to EMV cards is painful and expensive for both issuers and merchants. For the issuers, it’s much more expensive to produce smart cards. And for retailers, the equipment required to process transactions with smart cards is also costly.

How They Help

You’ve probably heard of credit-card skimming. Here’s a common scenario: You hand your credit card to the waiter, who disappears with your card. Before returning with your check, someone swipes your card on a skimming device that captures the account information. With your account data, the thief can create a “clone card” and make purchases with it. This is known as counterfeit fraud.

According to the Smart Card Alliance, when an EMV card is used, each transaction is encoded differently. So even if the transaction data is intercepted, it can’t be used to make new transactions. Most of the EMV cards you’ll be seeing will probably still have a magnetic stripe on the back, but new technology will make it very difficult to clone a card. The magnetic stripe on an EMV card contains data that identify the card as a smart card. If someone tries to use a clone that doesn't have a chip in it, it will most likely be flagged.

Another advantage of smart cards is that they will make overseas travel a little easier. Americans have had trouble for years when traveling in Europe with only a magnetic-stripe card. In most retail stores overseas, you can still use the magnetic-stripe card if the cashier has been properly trained and knows how to manually enter the data. But in some places where no employee is around, such as train kiosks, a smart card is required.

What EMV Cards Won’t Fix

Online fraud won't disappear after we get smart cards. Security experts predict that when cloning stops working, the incidence of online fraud will increase. Don't get a false sense of security after your credit cards go EMV. You will still need to monitor your credit-card accounts and bills diligently. That’s the best way to detect fraud in the early stages.

How Soon Will the U.S. Get Them?

The retailer-hacking scandals created pressure to move to smart cards as soon as possible. In recent testimony to Congress, Randy Vanderhoof, executive director of the Smart Card Alliance, estimated 1.6 billion smart cards are currently in the market, about 10 million to 15 million of which were issued in the U.S. Visa and MasterCard have given retailers an October 2015 deadline to make the transition. If retailers aren’t ready to accept smart cards by that date, they will be held liable for fraud. That's a pretty good financial incentive for merchants to buy the necessary equipment.

The Bottom Line

Credit-card fraud is on the rise; it's essential that the U.S. switch to EMV cards to increase security. The new smart cards will not entirely eliminate fraud, but the extra layers of security are expected to reduce counterfeit fraud by a large margin. They're a much better option than the magnetic-stripe cards we're currently using.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.