Credit risk is extremely important for the operations of every bank. This risk relates to the situation that the borrower will not be able to repay the loan and the related interest to the lender. The main reasons for this problem are inadequate credit standards for borrowers and other counterparties, poor credit portfolio management and insufficient commitment and monitoring of market changes. The aim of this paper is to systematize the most important knowledge about credit risk and determine its impact on the entire portfolio of the Croatian banking system. Poor risk management can have very adverse consequences not only for the bank and its customers, but also beyond. The economic crisis, the current COVID-19 pandemic and the conflict between Russia and Ukraine are increasingly encouraging banks to pay special attention to the credit risk of their placements. Uncertain environment and constant changes is the main challenge for banks in adopting the ability to manage financial risks for better competitiveness, but also to support and grow the economic sector. It is crucial for future competitiveness to introduce innovations and digital transformations supported by artificial intelligence. The risk analysis of the portfolio of Croatian banks leads to the conclusion that financial institutions must take all preventive measures to avoid preventing the occurrence of credit risks. Credit risk, unlike other risks, has significant consequences as it affects multiple stakeholders, the banking system, and even the economy. A successful financial system must have a successful risk management system and constantly develop it through new technologies and innovations.