Credit Spread

A credit spread is the difference between how much interest a company pays out on its debt and how much interest a government pays out on its. For example, company XYZ might be able to borrow money at a 2% interest rate for ten years (i.e. pay 2% interest on a ten-year loan), while a government might pay 1% interest (via a government bond) for the same amount of time. This means that company XYZ’s credit spread is 1% (a.k.a. 100 basis points). Credit spreads are used to measure the creditworthiness of a borrower: the higher the credit spread, the riskier the lending.

You can think of credit spread with yourself as the borrower: if you have a stable income and good credit, you might be able to get a loan with a reasonably low interest rate, lke 3%. But, if your income is erratic and you have bad credit, you might only be able to get a loan with an 8% interest rate – because you’re a riskier person to lend money to.