All credit cards, along with many identity cards and access cards, have a magnetic strip on their reverse side which contains information about the card and card holder. If this strip is demagnetized, the card will become useless in a card reader, regardless as to whether or not it is valid. A number of objects in daily life can demagnetize a credit card. If a credit card is handled with care, it should not become demagnetized, and if your credit card does get demagnetized, it will need to be replaced by the card issuer.

When you swipe or insert a magnetized card, the card reader picks up data from the tiny iron particles in the magnetic strip. The information is contained in binary form: each particle aligns along a north/south axis with some facing up and some facing down. With a credit card, the strip contains data like the name of the cardholder, the account number, the expiration, the pin number to access the card, the security code, country in which it was issued, and other such data. When the card is swiped in a terminal, this information is exchanged with a central server which authorizes the transaction depending on the available balance and whether or not the card has been reported stolen.

Because the information in the data strip is magnetic, it is susceptible to anything else which is magnetic, as being in contact with a magnetic field will erase the information by realigning the iron particles. Common demagnetizing culprits are the pads used to deactivite security devices in new books, CDs, and movies, some security screening machines, and even small magnets like those used on the fridge. Speakers, some cell phones, and magnetic clasps on wallets and purses can also demagnetize a credit card, and cards such as transit passes used on many subway systems are even more susceptible to being demagnetized. Some credit cards have been known to be demagnetized by strong electrical charges as well, which can potentially reverse the polarity of the iron particles.

When a clerk is unable to run a card because it has been demagnetized, it can be an indicator that the card is fake or stolen. For this reason, many credit card companies may request that a clerk call for authorization on a demagnetized card, to ensure that there is not a problem with the account. If this does happen to you, do not take it personally; simply file a request for a new card as soon as possible, and make sure to keep the new one safely stored in your wallet and well away from magnetic material. You can also use demagnetization to your advantage when you dispose of expired credit cards, because if the card is demagnetized, a thief cannot extract that encoded information and use it to steal your identity.