We estimate asset correlations from monthly time series of Moody’sKMVasset values for around 2,000 European firms from 1996 to 2004. We explore their impact on the value-at-risk (VaR) of credit portfolios in a (single-factor) market model and a (multi-factor) sector model. Our main finding is a complex interaction of asset correlations and default probabilities affecting portfolio risk. Averaging asset correlations on a sector level can substantially underestimate the VaR in a portfolio with heterogeneous borrower size. The VaR of the internal ratings-based model is more stable over time than the VaR of the market model and the sector model.