The U.S. credit card industry gets bigger every day, but there are still a few factors preventing it from reaching its full potential. One key factor is the prevalence of fraud. Studies show that credit card fraud and other forms of identity theft costs businesses $16 billion per year.

In an attempt to limit the risk of credit card fraud, the industry has started increasingly relying on chip card security. Here are the main things you should know about chip cards and why they’re safer to use than traditional credit cards with magnetic stripes.

What Are Chip Cards?

Chip cards are all credit cards that contain a microchip embedded inside them. This chip is the metallic square you can find on the front of most new credit cards. When you put a chip card into a reader, it creates a unique transaction code. With traditional credit cards, all the information is right there on the stripe, where it can easily get stolen.

Surprisingly, the U.S. is one of the few countries that still uses magnetic stripe cards. This magnetic stripe technology is fairly outdated, and the EMV standard (which relies on chip cards) is now the preferred payment method in most of the world.

Chip Card Security Features

So, why are chip cards so much safer than traditional credit cards? Two reasons:

Hard to Clone

As the name implies, magnetic stripe cards are magnetized. Every time you swipe one, the reader identifies its magnetic field and compares it to your bank account information. The issue is that this data is static, so fraudsters can easily lift it and clone it onto a new card.

Chip cards make this strategy all but impossible. The data stored on them changes all the time, making it hard to isolate and extract. The only way to rip it off is to manipulate the physical chip circuit, which is both difficult to do and requires very expensive, high-tech equipment.

Sophisticated Encryption

Magnetic stripe cards transmit bank information into the payment terminal with no encryption at all. Many terminals encrypt this information as soon as they receive it, but some don’t. With a chip card, you don’t have to worry about this part since it will have encryption of its own.

Chip Card Security Risks

The only real security risk with chip cards is that they still come with a magnetic stripe. If the store you’re in doesn’t have a payment terminal that supports chips, you’ll have to use the stripe. As you can imagine, this removes the security benefits of the chip.

The good news: whether you use the chip or the magnetic stripe, you still receive full fraud protection. If fraud does occur, the store will have to pay for the losses out of its own pocket.