The security code on the back of your credit card, which older credit cards may not have, is a three or four digit number used to verify that you actually hold the card. It is also called a CVV or CV2. There are a lot of questions about when it is safe to give this security code out, and when you should not release this information. It is usually safe to give out this code when shopping online, especially to well-known retailers, but you should never release it when you are using the card in person.
Generally, the security code was intended for extra protection when you purchase items on the Internet. It is used to verify that you in fact are entitled to use the card, and that you have all the information contained on the card. Since an online purchase doesn't show your card to the vendor, the number helps prevent the vendor from making a sale to someone fraudulently using the main number and expiration date, which might be stolen from the front of the card.
This is why you should never release the security code when you are present for a sales transaction. It doesn't show up when the card is scanned, or when a copy of the card is imprinted on a sales slip. People who steal this information, including some people who work at point-of-purchase businesses, don't have all the information needed to make most Internet purchases. Of course, not all companies online ask for your CVV, and it might be a good idea to only use vendors that will require this information when you shop on the Internet to support those vendors that are attempting to stop fraudulent use of your card.
Even with firewalls, security systems, and everything else in place, you cannot be 100% assured that giving out your security code on the Internet guarantees your safety. In all instances where you disclose all relevant information needed to make Internet purchases, there is a chance that people taking that information might steal it. This is why you must view the security code as only one method of attempting to prevent Internet fraud. Careful scrutiny of charges on your credit card, and not giving this information out to unknown vendors is important too.
You can be more certain of larger and more reputable vendors when you are asked for your security code. You should probably avoid giving this information out to vendors you have never heard of before, and who don't seem to have a high amount of site traffic. You may also be asked for your security code number when you purchase things on the telephone, and you should probably not give this information out if you're on a cellphone in a public venue.
It is very clear though, that if you are purchasing something in person, a retailer will not ask for your CVV. He or she will usually verify your right to use the card by comparing signatures on the back of the card and the receipt.