(Reuters) - Capital One Financial's ( COF ) first-quarter profit rose 35% as customers paid more on the company's credit-card loans amid higher interest rates.

Net interest income (NII) - the difference between what it makes on loans and pays out on deposits - rose 4% to $7.49 billion in the quarter, the McLean, Virginia-based company said on Thursday.

Credit card business makes up nearly half of the loan portfolio of Capital One, which is the third-largest issuer of Visa and Mastercard credit cards in the United States by balances.

Capital One, which is acquiring Discover Financial for $35.3 billion in an all-stock deal, said provision for credit losses fell to $2.68 billion from $2.80 billion a year earlier.

Net charge-offs, or debts that are unlikely to be recovered, jumped 54% to $2.62 billion, it said.

Capital One's non-interest income, which primarily consists of interchange income, net of reward expenses, service charges and other customer-related fees, jumped 11% to $1.91 billion in the quarter.

The lender also incurred an expense of $42 million related to the additional special assessment fee that it had pay to replenish the Federal Deposit Insurance Corp's deposit insurance fund.

Capital One's net income available to common stockholders rose to $1.20 billion, or $3.13 per share, in the three months ended March 31, from $887 million, or $2.31 per share, a year earlier.

(Reporting by Arasu Kannagi Basil in Bengaluru; Editing by Sriraj Kalluvila)