A method and system for distributing credit using a fiber channel switch element is provided. The switch element includes, a wait threshold counter that is used to set up a status for a port that has to wait for certain duration to send a frame due to lack of buffer to buffer credit; a credit module that controls buffer to buffer credit for a transmit segment of the fiber channel switch element; and a virtual lane credit module with a counter that is incremented every time a frame assigned to a virtual lane is sent and decreased every time a VC_RDY is received. The method includes, determining if a VC_RDY primitive is received; and allocating credit to a virtual lane that is not at its maximum credit, after the VC_RDY primitive is received.