How a Line of Credit Works in Canada: Daily Interest, Variable Pricing and Limit Reductions

A line of credit is a revolving account with a set limit: you draw money when you need it, interest is calculated daily on whatever you have actually drawn, and the unused portion stays available. Because of that daily calculation, what a line of credit costs depends far more on how long you carry a balance than on how big your limit is. This guide explains the daily-interest mechanics, why the rate on most lines is variable, and the circumstances in which a lender reduces or freezes a limit after the account is open.

What a line of credit is, and how it differs from a loan

An instalment loan advances one sum and is repaid on a fixed schedule. Once the money is advanced, the term, the payment and the cost are largely locked in. A line of credit does the opposite: it is a standing facility you draw from as needed, and the total cost only becomes clear once you know how much you used and for how long.

• Limit: the maximum you are permitted to owe at any one time. It is not money in your account — it is a permission to borrow up to a ceiling.
• Drawn balance: the amount you have actually used and now owe.
• Available credit: the limit minus the drawn balance. This is what you can still draw.
• Revolving: as you repay principal, the available credit goes back up. You are not re-applying each time.
• Minimum payment: usually the interest accrued in the period plus a small percentage of the principal. Paying only the minimum keeps the account in good standing but does very little to reduce the balance.

That last point is the single most important difference between a line of credit and a loan. An instalment loan forces principal reduction through amortisation. A line of credit does not. If you only ever pay the minimum, the balance can sit there for years.

Daily interest on the drawn balance: how the cost actually builds

Interest on a line of credit accrues every day, on the closing balance of that day. The daily charge is the drawn balance multiplied by the annual rate and divided by the days in the year under the lender's disclosed calculation method; the exact method, including how rate changes and partial days are treated, is set out in the credit agreement. Accrued interest is then charged to the account at the end of the billing period, and your payment is applied against it.

Three practical consequences follow from that mechanic:

1. The limit you do not use costs nothing. A large approved limit is not itself expensive. Only the drawn balance accrues interest.
2. Timing inside the cycle matters. A draw made at the start of a billing period accrues more interest than the same draw made near the end, because it is outstanding for more days.
3. Unpaid interest can grow the balance. Where the agreement provides for accrued interest to be added to the principal when it is not paid, that added interest then attracts interest itself. This is why a line of credit can quietly compound if it is left alone.

Interest is not necessarily the only charge. Some accounts carry a set-up fee, an annual fee, or a fee if the account sits unused, and some secured lines involve a property appraisal or registration cost. These have to be disclosed in the agreement, so read the cost-of-borrowing section rather than assuming the advertised rate is the whole story. For context on how high credit costs can legally go in Canada: the Criminal Code sets the criminal rate of interest at 35% per year (s. 347), calculated using a defined method that aggregates interest and certain charges. That is an outer legal ceiling, not a normal price, and it is not a figure any consumer should treat as a benchmark.

Why the rate on your line is usually variable

Most consumer lines of credit in Canada are priced as a spread over the lender's prime rate, and prime itself moves with the Bank of Canada's policy interest rate. The Bank of Canada publishes its policy rate and the related benchmark rates that lenders reference. When the policy rate moves, prime typically follows, and the interest charged on your existing balance moves with it — within the notice period your agreement specifies.

Two things are worth separating here. The first is the index: prime, which you do not control. The second is the spread: the amount added on top of prime, which the lender sets and which reflects your income, credit history, how much other debt you carry, and whether the line is secured. A well-qualified borrower and a marginal one can hold the same index and pay very different total rates.

Variable also means the spread can be changed. Many agreements allow the lender to adjust pricing on notice, subject to whatever disclosure rules apply to that lender. Your line of credit is generally a demand facility, meaning the terms are not fixed for a set term the way a mortgage is. Note also that you cannot directly compare a line of credit rate with a fixed-rate mortgage rate: Canadian fixed-rate mortgages are compounded semi-annually by law, while line of credit interest is typically calculated daily on the balance. The headline numbers are not measuring the same thing.

Secured and unsecured lines of credit

An unsecured line is granted on the strength of your income, credit history and existing obligations. Because the lender has no asset to seize if you default, limits tend to be more conservative and rates higher than on a secured equivalent. A home equity line of credit (HELOC) is registered against your property, which lowers the lender's risk and generally improves the pricing and the limit — at the cost of putting your home behind the debt.

Secured lending is also constrained by rules. At federally regulated lenders, home equity lines of credit are generally limited to 65% of appraised property value, with total secured lending usually capped at 80%. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44% and apply a qualifying stress-test rate above the contract rate under Guideline B-20. The Financial Consumer Agency of Canada publishes consumer guidance on these rules and on how complaints are handled; federally regulated institutions' consumer complaints go to the FCAC, while provinces license and supervise most other lenders and each has a consumer protection office.

The payday comparison is included deliberately. Where a province operates a licensed payday lending regime, federal payday lending regulations (SOR/2024-114) cap the cost of borrowing at $14 per $100 advanced, and some provinces set a lower cap, in which case the lower figure applies. Quebec does not license payday lending, which effectively prohibits the model there. Even at the capped price, a payday loan costs dramatically more per dollar borrowed than a line of credit, because the charge is compressed into a very short term.

How limits get reduced — and why it can happen without warning

A line of credit limit is not a permanent entitlement. It is a contractual permission the lender can withdraw or shrink under the terms of the agreement, and most consumer lines are structured as demand facilities. Common triggers include:

• Deterioration on your credit report. Late payments, collections, or new accounts elsewhere can be visible to the lender on the next review. Canada has two national credit reporting bureaus, Equifax Canada and TransUnion Canada, and a free copy of your credit report is available from each — worth checking before you apply, because the two files do not always match.
• A jump in your debt load. New loans, higher card balances or a second line of credit increase the lender's exposure and can push your ratios past their internal thresholds.
• Loss of income or a change in employment. Lenders periodically re-verify the information the original decision was based on.
• Falling property values, on a secured line. If the home no longer supports the loan-to-value ratio, the limit may be cut at renewal or reappraisal.
• Lender-level policy changes. A lender may tighten an entire portfolio for its own risk or capital reasons. This can happen to borrowers who have done nothing wrong.
• Insolvency filings. A consumer proposal stays on a credit report for three years after completion, or six years from filing, whichever comes first, and a first bankruptcy stays on file for six years after discharge. Lines of credit are typically frozen when a filing occurs. Only a licensed insolvency trustee can administer a consumer proposal or bankruptcy, and trustees are regulated by the Office of the Superintendent of Bankruptcy Canada.

Two consequences are worth understanding. First, if your limit is reduced below your drawn balance, you cannot draw further and you will be required to repay the excess on whatever schedule the lender sets — that is the moment a flexible facility turns into a demanding one. Second, a reduced limit feeds back into your credit score, because credit utilization is calculated as balance divided by limit. A cut raises your utilization ratio on the same balance, which can weigh on your score, which can trigger further cuts elsewhere. If a limit is reduced, ask the lender in writing what specifically triggered the review and whether it can be reconsidered; a review is sometimes possible if your circumstances improve, but it is not a right.

How to apply for a line of credit

1. Pull both credit reports. Request the free report from each national bureau and check for errors before a lender sees them.
2. Get your numbers in order. Lenders assess income, existing debt payments and housing costs. At federally regulated lenders, expect a total debt service ratio ceiling of roughly 44% and, on secured lending, a qualifying stress-test rate above the contract rate.
3. Decide secured or unsecured. A secured line usually means better pricing and a bigger limit, and it puts an asset at risk. That trade-off is not automatically worth it.
4. Compare on more than the headline rate. Ask how the rate is set, what index it tracks, how much notice you get before a rate or limit change, whether there are set-up or annual fees, and whether the facility is repayable on demand.
5. Read the change-in-terms and demand clauses. These govern the limit reductions described above. If you cannot find them, ask the lender to point them out.
6. Draw only what you need, and pay more than the minimum. Every extra dollar of principal paid reduces tomorrow's daily interest charge permanently.

When a line of credit is the wrong tool

A line of credit is efficient for bridging a known, temporary gap — a timing mismatch in income and expenses, a planned renovation, a purchase you will repay over months. It is a poor tool for an ongoing shortfall. If you are drawing to cover regular expenses you cannot meet from income, the balance will not fall, and the daily interest will keep working against you. It is also a poor tool for consolidating credit card debt if you then rebuild the card balances, because you have converted unsecured debt into debt that may be secured against your home and left yourself with two balances instead of one.

Significant borrowing decisions deserve regulated professional advice on your own circumstances — a licensed insolvency trustee for debt you cannot service, a licensed mortgage professional for secured borrowing, and a tax professional where interest deductibility is relevant. Nothing here is financial, legal or tax advice.

loanloon.ca is a matching and comparison service, not a lender. We do not make loans, set rates, or make credit decisions, and we cannot approve anyone. Any request you submit is passed to participating providers who make their own assessments. The lowest advertised rates on any credit product are only available to the most qualified applicants, and the rate you are actually offered depends on your credit history, income, existing debts and whether the borrowing is secured — so compare the total cost of the offers in front of you, not the best rate printed on a page.

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• Financial Consumer Agency of Canada — Financial Consumer Agency of Canada
• Bank of Canada — rates — Bank of Canada