Banks lend out deposits that other people make. They also profit from this through the net interest margin - banks pay people for depositing into a savings account (usually <1%) and lend money at a higher rate through credit cards, loans, mortgages etc at a higher rate.
Generally there’s a low risk that everyone is going to withdraw their deposits at the same time, or that everyone will not pay their credit card bills. If that happened they’d be in trouble and would need support from central/federal bank. Because of this it’s relatively safe to lend deposit fund’s.
okay_letsgooo t1_j2avlau wrote
Reply to ELI5: How do loans and credit cards work by idkmybffdee
Banks lend out deposits that other people make. They also profit from this through the net interest margin - banks pay people for depositing into a savings account (usually <1%) and lend money at a higher rate through credit cards, loans, mortgages etc at a higher rate.
Generally there’s a low risk that everyone is going to withdraw their deposits at the same time, or that everyone will not pay their credit card bills. If that happened they’d be in trouble and would need support from central/federal bank. Because of this it’s relatively safe to lend deposit fund’s.