A method and system for credit recovery of lost frames and R_RDYs in an in-line credit extender is provided. The method includes, comparing received frame count and a programmable counter value when BB_SCs are received; loading the difference between the frame count and the programmed counter value into a buffer and to a first counter that counts each frame that is transmitted; and sending BB-SCs to the local device if there is a match between the first counter value and a second programmable counter value. The method also includes, counting received R_RDYs, wherein a first counter counts the received R_RDYs; setting a flag when a BB_SCr is received; and transmitting BB-SCr when the first counter value is zero and the flag is set. Also, R_RDYs received after BB_SCrs are counted by a second counter and transmitted when the second counter value is non-zero.