Credit Enhancement

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DEFINITION of 'Credit Enhancement'

A method whereby a company attempts to improve its debt or credit worthiness. Through credit enhancement, the lender is provided with reassurance that the borrower will honor the obligation through additional collateral, insurance, or a third party guarantee. Credit enhancement reduces credit/default risk of a debt, thereby increasing the overall credit rating and lowering interest rates.

BREAKING DOWN 'Credit Enhancement'

Credit enhancement is used to obtain better terms for an outstanding debt. Securitization, posting collateral and obtaining external credit enhancement such as a letter of credit are some basic forms of credit enhancement. Firms may also increase cash reserves or take other internal measures to uphold superior solvency ratios.

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RELATED FAQS
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    A credit rating is an assessment of an individual's creditworthiness. This evaluation is based on an individual's history ... Read Full Answer >>
  3. How can I improve my credit score?

    If you are looking to take out a loan or apply for a credit card, then it will be very important for you to have a good credit ... Read Full Answer >>
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