Credit risk vs counterparty risk

What is the difference between credit risk and counterparty risk?

Credit risk is the broad risk that a borrower fails to repay what it owes. Counterparty risk is narrower — the risk that the specific party on the other side of a contract defaults on it. Where they overlap, on an unsettled obligation owed by a named partner, is counterparty credit risk.

The practical distinction is scope. A bank’s credit risk spans its whole loan portfolio; its counterparty risk is about each individual trading partner — a single insolvency, a single judgment debtor, a single supplier that fails to deliver.

For most businesses outside banking, the version that matters day to day is counterparty credit risk: deciding whether to extend payment terms, prepay, or sign a long contract with a specific company. That decision turns on that company’s own track record, not a market average.