Credit contagion means that the credit deterioration of an entity causes the credit deterioration of other entities. In this paper, we build and test a continuous-time model for defaultable securities using a diffusive process for risk-free interest rate, and a finite-state continuous-time Markov process for the correlation of credit. The credit contagion, in particular, is established by relating transition rates of various credit states. Examples of derivative pricing with calibrated credit contagion model are provided. Initial empirical results with the benchmarks of Brady bonds show that our model is a viable new technique for the pricing and risk-managing of credit derivatives.