What Is a Credit Derivative? A credit derivative is a financial contract that allows parties to minimize their exposure to credit risk. Credit derivatives consist of a privately held, negotiable bilateral contract traded over-the-counter (OTC) between two parties in a creditor/debtor relationship. These allow the creditor to effectively transfer some or all of the risk of
What Is Credit Enhancement? Credit enhancement is a strategy for improving the credit risk profile of a business, usually to obtain better terms for repaying debt. In the financial industry, credit enhancement may be used to reduce the risks to investors of certain structured financial products. [Important: Credit enhancement reduces the default risk of the company’s
What Is Credit Exposure? Credit exposure is a measurement of the maximum potential loss to a lender if the borrower defaults on payment. It is a calculated risk to doing business as a bank. For example, if a bank has made a number of short-term and long-term loans totaling $100 million to a company, its
What Is a Credit Facility? A credit facility is a type of loan made in a business or corporate finance context. It allows the borrowing business to take out money over an extended period of time rather than reapplying for a loan each time it needs money. In effect, a credit facility lets a company
What Is a Credit Freeze? A credit freeze, also known as a security freeze, is an anti-fraud measure in which a credit bureau refrains from sharing a consumer’s credit report with any third parties. Credit freezes are often initiated at the request of consumers who suspect that their identities may have been stolen. To prevent
What Is Credit History? Your credit history is a measure of your ability to repay debts and demonstrated responsibility in repaying them. It is recorded in your credit report, which details the number and types of your credit accounts, how long each account has been open, amounts owed, the amount of available credit used, whether
What Is a Credit Inquiry? A credit inquiry is a request by an institution for credit report information from a credit reporting agency. Credit inquiries can be from all types of entities for various reasons, but they are typically made by financial institutions. They are classified as either a hard inquiry or a soft inquiry.
What Is a Credit-Linked Note? A credit-linked note (CLN) is a security with an embedded credit default swap permitting the issuer to shift specific credit risk to credit investors. Credit-linked notes are created through a special purpose vehicle (SPV), or trust, which is collateralized with AAA-rated securities. Investors buy credit-linked notes from a trust that
What Is a Credit Mix? Credit mix refers to the types of accounts that make up your credit report. Credit mix determines 10% of your FICO score. The different types of credit that might be part of your credit mix include credit cards, student loans, automobile loans, and mortgages. Credit mix might have a larger
What Is Credit Money? Credit money is monetary value created as the result of some future obligation or claim. As such, credit money emerges from the extension of credit or issuance of debt. In the modern fractional reserve banking system, commercial banks are able to create credit money by issuing loans in greater amounts than
