Key takeaways
- Credit card issuers earn interest and transaction revenue
- Merchant fees help finance rewards and cashback programs
- Banks price default risk across entire loan portfolios
Imagine a bank giving 100 customers credit cards with $10,000 limits. Some repay everything, others carry balances for years, and a few might never repay what they borrow.
The bank knows this before issuing the cards. Yet it still encourages customers to spend more, sometimes offering cashback, airline miles or generous welcome bonuses.
Why would a financial institution deliberately lend money it might never recover? Because credit card companies do not need every individual customer to be profitable. They need the overall portfolio to generate enough revenue to cover losses, funding costs and operating expenses.
How Credit Card Companies Make Money From Spending
The credit card business has several revenue streams, and interest is among the largest.
When customers carry balances beyond their grace periods, issuing banks generally charge interest. According to the Consumer Financial Protection Bureau, US consumers were assessed approximately $160 billion in credit card interest during 2024, compared with $105 billion in 2022.
The average annual percentage rate on general-purpose credit cards reached 25.2%, demonstrating how expensive revolving credit can become.
However, issuers can also earn money when customers pay their statements in full.
Merchants generally pay fees for accepting card transactions, with a portion flowing to the issuing bank through interchange. These economics help support cashback rewards, promotional benefits and other incentives designed to encourage spending.
Annual fees provide another revenue source. Premium products such as Robinhood's $695 Platinum card illustrate how some issuers charge customers for access to travel benefits, rewards and additional services.
Importantly, Visa and Mastercard primarily operate payment networks. The banks issuing cards generally extend credit and bear the associated borrower default risk.
Why Banks Accept the Risk of Customers Defaulting
Credit card issuers evaluate profitability across millions of accounts rather than assuming every borrower will repay.
Credit scores, income information, payment history and spending behavior help banks estimate how likely different customers are to default.
Consider a simplified portfolio of 1,000 customers:
| Portfolio Component | Illustrative Annual Amount |
|---|---|
| Interest income | $300,000 |
| Net transaction-related revenue | $100,000 |
| Annual and other fee income | $50,000 |
| Credit losses | −$120,000 |
| Funding and operating costs | −$200,000 |
| Remaining contribution | $130,000 |
Hypothetical figures illustrating portfolio economics, not an actual bank's financial results.
The example shows how a lender can remain profitable even when some customers fail to repay. However, rising defaults can quickly erode that profitability.
The Federal Reserve's data showed an annualized credit card charge-off rate of 3.82% during the second quarter of 2026.
A charge-off represents debt a bank has recognized as unlikely to be collected, although recovery efforts may continue.
Why Credit Card Rewards Encourage More Spending
Cashback and rewards are not simply gifts. They are customer acquisition and retention tools.
A card offering 2% cashback gives customers a reason to use it frequently, potentially increasing transaction-related revenue and strengthening the relationship with the issuing bank.
Retail partnerships also benefit from this arrangement. The growth of crypto-linked cards demonstrates how payment providers use rewards to encourage consumers to adopt new financial products.
Nevertheless, encouraging spending creates an important trade-off. Customers who pay in full can generate transaction-related income without paying purchase interest, while borrowers who carry balances may face substantial financing costs.
Banks must balance these opportunities against defaults, fraud, rewards expenses and regulatory requirements.
Ultimately, credit card companies are willing to lend money they might never fully recover because profitability depends on the combined economics of millions of transactions and borrowers.
The model works when interest, fees and other revenue exceed the cost of funding, rewards, operations and unpaid debts. It becomes vulnerable when that balance shifts.
