- You pay interest only on what you borrow, from the day you withdraw it until it’s repaid in full.
- Rates are usually variable, and FCAC says they’re usually lower than on a credit card or personal loan.
- The minimum payment is often just the monthly interest, so paying only the minimum never clears the debt.
- Secured lines, such as a home equity line of credit, usually carry lower rates than unsecured personal lines.
Checked October 2026
How a line of credit works
Your lender sets a limit. You can use as little or as much of it as you like, for any purpose, and pay it back whenever you want. As you repay, the room opens up again. That’s the difference from a loan, where you get one amount and pay it down to zero.
FCAC lists the usual ways to draw on it: write a cheque from the line, use an ATM, pay a bill through online or telephone banking, or transfer money to your chequing account. Some lines charge a registration or administration fee, so ask before you sign.
Each month you get a statement showing what you owe and a minimum payment, which is usually equal to the month’s interest. Paying only that keeps the account in good standing, but the balance never shrinks.
How interest is charged
Interest starts the day you withdraw money and runs until you pay the balance back in full. There’s no interest-free grace period like the one on credit card purchases. Most lines have a variable rate, so your cost moves when rates rise or fall, and your credit score affects the rate you’re offered: usually, the higher the score, the lower the rate.
To see what that means in dollars: if you owe $5,000 at 9% a year and the balance doesn’t change, you’d pay about $450 in interest over a year, or roughly $37.50 a month. That $37.50 is about what an interest-only minimum payment looks like. Every extra dollar you pay goes straight to the balance.
Types of lines of credit
Personal line of credit
Unsecured, so nothing is pledged as collateral. FCAC says it’s often used for unexpected expenses or to consolidate higher-rate debt, at rates usually below cards and personal loans.
Student line of credit
Unsecured and meant for post-secondary costs such as tuition, books and housing.
Secured line of credit
Backed by an asset such as your car or home. If you don’t repay, the lender can take it, which is why the rate is usually lower than an unsecured line.
Home equity line of credit
Secured by your home, with a higher limit and a lower rate than most other credit. You may borrow up to 65% of your home’s value. See what a HELOC is.
Line of credit vs credit card vs personal loan
| Line of credit | Credit card | Personal loan | |
|---|---|---|---|
| How you borrow | Any amount up to your limit, any time | Purchases up to your limit; cash advances cost extra | One fixed amount up front |
| Interest-free period | None: interest from the day you withdraw | At least 21 days on purchases from federally regulated issuers, if you pay in full | None |
| Rate | Usually variable and lower than cards and personal loans | Usually higher; FCAC’s example is 19% on purchases and 22% on cash advances | Fixed or variable, set for the term |
| Repayment | Minimum is often just the interest | A minimum payment each month | Fixed instalments; most terms run 6 to 60 months |
| Suits | Irregular costs, consolidating higher-rate debt | Everyday spending you clear every month | A one-time cost you want paid off on a schedule |
Sources: FCAC pages on lines of credit, credit cards and personal loans.
The credit card column has one big advantage: if you pay your full balance by the due date, purchases cost nothing. Carry a balance, though, and a line of credit is usually the cheaper place to hold it. FCAC itself suggests a personal loan or line of credit as a cheaper way to borrow than a cash advance.
Line of credit or car loan?
A car loan is a secured loan: a fixed amount, fixed payments over a set term, with the car as collateral. A line of credit gives you flexibility to pay faster or slower, but the rate usually floats and nothing forces the balance down. If you know you’ll stick to a schedule, either can work; if you don’t, the loan’s structure does the discipline for you. Compare payments by term with our loan calculator.
Getting one, and your rights
Lenders confirm your identity, then look at your income, your debts with other lenders and your credit report and score. FCAC says they usually require a minimum household income. If you’re working on your score first, see what a good credit score is.
With a federally regulated lender, you have specific rights:
- They need your express consent to open the line, and a bank needs it again before raising your limit.
- An information box must show the rate or how a variable rate is calculated, when interest starts, how the minimum payment is worked out, and the fees.
- You get a statement at least once a month while there’s activity, showing the rate that applied on each day and the credit you have left.
- Your bank must alert you when the credit available on a personal line of credit drops below $100, or an amount you choose.
- Line of credit insurance is optional. The lender can’t make it a condition, and it needs your express consent.
Using a line of credit well
- Borrow for a planDecide what the money is for and how you’ll pay it back before you draw.
- Pay more than the interestSet an automatic payment above the minimum so the balance actually falls.
- Watch the rateVariable rates move. If rates rise, check that your payment still fits your budget.
- Don’t refill old debtIf you use the line to pay off credit cards, keep the cards paid in full so you don’t end up with both balances.
Frequently Asked Questions
What is a line of credit?
It’s a loan with a pre-set limit that you can borrow from, repay and borrow again, for any purpose. You only pay interest on the amount you’ve used.
How does interest on a line of credit work?
Interest is charged from the day you withdraw money until you repay it in full, usually at a variable rate. There’s no interest-free grace period, and the minimum payment is often just the month’s interest.
Is a line of credit cheaper than a credit card?
Usually, if you carry a balance. FCAC says line of credit rates are usually lower than credit card rates. But card purchases cost nothing if you pay the full balance within the grace period, which is at least 21 days at federally regulated issuers.
What can I use a line of credit for?
Anything. A line of credit doesn’t have to be used for a specific purpose, which is why it’s handy for irregular costs and emergencies.
Can I use a line of credit to pay off credit card debt?
Many people do. FCAC notes personal lines of credit are used to consolidate higher-rate debt. It only saves money if you then keep the cards paid in full.
What credit score do I need for a line of credit?
There’s no single cut-off. Lenders review your income, debts and credit report and usually require a minimum household income. A higher score usually gets a lower rate.
What is a secured line of credit?
It’s a line backed by an asset, such as your car or home. You may get a lower rate than an unsecured line, but the lender can take the asset if you don’t repay. A HELOC is the most common example.
Should I use a line of credit or a car loan?
A car loan gives you fixed payments that end on a set date. A line of credit is more flexible but usually has a floating rate and an interest-only minimum. Choose the structure that keeps you paying it down.
Does a line of credit affect my credit score?
Yes. Applying creates a hard inquiry, the line appears on your credit report, and how much of the limit you use counts toward your credit utilization.
Do I need line of credit insurance?
No. It’s optional, the lender can’t require it, and it needs your express consent. Read the exclusions and maximums before you buy it.
Try this next
Sources, checked October 2026
- FCAC: Lines of credit canada.ca
- FCAC: Lines of credit: know your rights canada.ca
- FCAC: How credit cards work canada.ca
- FCAC: Personal loans canada.ca
- FCAC: Home equity lines of credit canada.ca
General information for Canadians, not financial, tax or legal advice. Rules and menus change, so confirm details with your bank, lender or the Government of Canada. See our methodology.