More than 25% of credit bonds in China received improved issuance ratings, among which 96.6% used credit enhancement. We find that credit enhancement can effectively lower credit spreads, which still holds after a battery of robustness tests. We employ the propensity score matching method, the instrumental variable approach, and firm–year fixed effects to address endogeneity. The risk reduction and loss sharing mechanisms are identified empirically; the information production and liquidity improvement channels are excluded. Our results suggest that credit enhancement usage provides a market solution for low-rated firms to issue high-rated bonds and lower the cost of debt financing.