Though most adults have plastic credit cards or debit cards that they use for purchasing goods and services, few likely know how the magnetic strip on the back of the card works. The magnetic strip actually comprises very small iron-based magnetic particles in a plastic-like film.
Each particle is a tiny bar magnet designed so that the magnetic strip can be written in either a north pole– or a south pole–direction. (They must be one or the other.) The magnetization can then be “read” when the user swipes the credit card through a particular machine.
To be more specific, the magnetic strip is actually split into three tracks “understood” by a magnetic strip reader (that is, the particular machine). Each track holds a specific number of characters with defined functions. The characters contain information about the cardholder and his or her account, but they can be “read” only in a certain order, and they are encrypted. So, even if someone did access the heavily guarded communication lines between banks and retailers, the cracker would also have to determine the encrypted code before he or she could use the card’s details to commit fraud.
Three methods are commonly used to determine that a user’s credit card is legitimate and will pay for what he or she is charging. First is the conventional means of using a touch-tone phone to dial in for permission. Second is a virtual terminal on the Internet. Third is the card-swiping machine—today’s most frequently used method for purchasing goods and services in stores.
In the card-swiping method, information held on the magnetic strip is picked up by Electronic Data Capture, or EDC. After the plastic card has been swiped, the EDC software contacts an acquirer by dialing a stored telephone number through a modem. An acquirer is the organization collecting credit authentication requests from retailers and providing them with a payment guarantee. When the acquirer receives an authentication request, it checks the transaction for validity and the magnetic strip record for important particulars. If a user’s credit card appears to be dysfunctional at the time that an attempted purchase is made, often the problem is that the magnetic strip has become damaged or obscured.
Cardy, L. The Credit Card Strip: How Does It Work? [Online, 2004.] Crystal Guides Limited Website. http://www.theanswerbank.co.uk/Article361.html.