Lines of Credit: Handy Backup or Debt That Never Ends?

The question usually goes like this: is it worth getting a line of credit just to have it available, and would it make you more likely to be approved for a mortgage? Those are two separate questions with two different answers.

For a mortgage: no

We found no Canadian rule, insurer guideline or lender document that gives you credit for simply having a line of credit. If your balance is $0, the formula mortgage insurers publish counts nothing, so it usually neither helps nor hurts. Some lenders may go further and count the limit as if you had borrowed it, which can reduce what you qualify for.

Applying also adds a hard inquiry and a new account to your credit file. We found nothing showing that this helps someone who already has a couple of credit accounts in good standing, whether the next application is for a mortgage, a car loan or a credit card.

As a backup: sometimes

A no-fee line with a modest limit can be a reasonable second layer behind some cash savings, if your income is steady and you would repay it on a schedule. Just do not count it as your emergency fund. The bank can lower or close it even if you have done nothing wrong, and that can happen just when your income drops and you need it most.

A line of credit is a loan you can draw on up to a pre-set limit. You borrow as much or as little as you need, and you pay interest only on what you borrow. As you repay it, that room opens up again, so you can borrow again without reapplying. This is called revolving credit.

Three features set it apart from a regular loan:

• Interest starts the day you withdraw. It runs until you pay the balance back in full. The lender agreements we read say no interest-free grace period applies.
• The rate usually moves. Most lines are variable, set as the prime rate plus a spread. When prime goes up, so does your rate.
• The minimum payment can be tiny. It is often just the month's interest. The Financial Consumer Agency of Canada (FCAC) warns that paying only the interest means you will never pay off the debt.

Line of credit or credit card?

A line usually has a much lower rate, so it wins if you need months to repay. A card wins for anything you repay by the due date, because a line charges interest from day one.

The name "line of credit" says little about the price. What secures the debt, and who lends it, matters much more.

Your rate is normally prime plus a spread. The Bank of Canada raised its policy rate to 2.50% on October 28, 2026, and prime rose to 4.70% the next day. Its next scheduled decision is December 9, 2026, so check current rates before you compare offers.

Most big banks do not publish their spreads. You find out your rate when you are approved, and it depends on your credit and income. National Bank is one exception, listing its small Integrated line at prime + 7.00%, which is 11.70% with prime at 4.70%.

That makes national averages the best guide. These are Bank of Canada averages for chartered banks in August 2026, before the October rate increase.

On a $10,000 balance held for a year, interest comes to about $836 at 8.36%, compared with about $2,135 at 21.35%. If you pay only the interest on the line, that is roughly $70 a month, and you still owe $10,000 at the end of the year.

What it costs to hold one

• An unsecured line can cost nothing until you use it. Scotiabank, for example, lists no annual fee on its ScotiaLine. Some lines do charge registration or administration fees, so ask.
• A HELOC can cost money even if you never use it. FCAC lists appraisal, legal, title search and administration fees among the costs you may pay.
• Insurance is the usual paid add-on. It is optional, and we explain it further down.

We found no Canadian source that says how many points a line of credit adds or removes at any stage. Scoring formulas are private, and any change depends on the rest of your file. What Canadian sources do publish is the direction.

More room can help on paper. FCAC suggests using less than 30% of your limit, and says a higher limit used lightly helps that ratio. A large unused line lowers your overall ratio by simple arithmetic. How much that helps is not published, and it may do little if one card is nearly full.

Credit mix is the best argument for a line, and it is a modest one. FCAC says you may have a lower score if you only have one type of credit, and it lists a line of credit among the types that add variety. But Equifax calls credit mix generally one of the smaller factors, says that does not mean you should open accounts you do not need, and groups credit cards and lines of credit together as revolving debt. If you already have a card, a line may add less variety than it sounds.

Shopping around for a mortgage is generally counted as one inquiry if the checks are close together, and Equifax says the window ranges from 14 to 45 days. We found no Canadian source that extends this to lines of credit, so apply only where you are ready to borrow.

Mortgage lenders look at your income, your debts, your credit, your down payment and the property. With less than 20% down, your mortgage must be insured, and federal rules set the main limits:

• Credit score: at least one borrower or guarantor needs a score of 600 or higher.
• Gross debt service (GDS): your housing costs cannot exceed 39% of your gross income. Housing costs mean your mortgage payment, property tax, heat and half of any condo fees.
• Total debt service (TDS): your housing costs plus all your other debt payments cannot exceed 44% of your gross income.
• Stress test: you qualify at the higher of your contract rate plus 2%, or 5.25%.

Federally regulated lenders use the same stress test on uninsured mortgages, but each lender sets its own GDS and TDS limits. Nothing in these rules gives you credit for holding a line of credit. A line can only show up as a payment.

How a line counts

Here is how the rules published by CMHC, Sagen and Canada Guaranty treat a line of credit in your TDS.

That "nothing" for a $0 line comes from the formula. CMHC and the private insurers do not say it in so many words, and their rules are minimums, so a lender can be stricter. In a 2018 Global News story about HELOCs, TD and RBC said they consider available credit, while Scotiabank said it had not adopted that approach. Quebec's brokerage regulator, the OACIQ, describes 3% of the limit for a personal line. Innovation Credit Union says some lenders might use the limit. We found no current statement from a big bank either way.

What a balance does to your borrowing power

A balance can cost more than you would guess, because the 3% rule assumes a payment far above the interest you may actually pay. At 8.36%, the interest on $10,000 is about $70 a month, but insurers count at least $300.

This is an example from our Home Affordability Calculator, not a lender's calculation: $90,000 income, $60,000 down, a 4.5% example mortgage rate (6.5% qualifying rate), a 25-year amortization, Ontario, and the tool's simplified property tax and heating estimates.

• The first debts can be free. Housing costs are capped at 39% of income and all debts at 44%. That 5-point gap is $375 a month at $90,000 of income, so with no other debts, a $300 payment fits inside it.
• Past the gap, it gets expensive. In this example, each $1 of balance removes about $3.80 of buying power. Across incomes from $70,000 to $120,000, rates from 4% to 5%, and 25- or 30-year amortizations, the same $300 a month took about $25,000 to $43,000 off the highest price. The drop is smaller at higher incomes, where part of the payment still fits inside the gap.
• Paying it off does not always win. With the car payment, using $10,000 of a $60,000 down payment to clear the balance raises the highest price by about $29,000. With no other debts, the same move lowers it by about $9,000, because the balance was not costing you anything and your down payment shrank.

Do not open one during the mortgage process

Pre-approval is not final approval. Sagen says your credit score, income, employment and debt will be re-verified. RBC tells buyers to avoid applying for other credit during pre-approval, and CIBC warns that a change such as a new car loan could delay closing and that a lender could withdraw its offer. Sagen also has lenders resubmit a file if one part of your TDS changes by more than 5%, or your ratio moves by more than two percentage points.

No source sets a number of months to wait before you apply. But a line opened just before an application adds a hard inquiry and a new account, and it cannot show a payment record. If a line is going to help your file at all, that takes years, not months.

The one case where it might help

If you have little credit history, a line could become one more seasoned account on your report. Canada Guaranty says creditors typically want at least two open accounts, each used for at least two years. But CMHC and Sagen both name a credit card as the place to start, and Canada Guaranty lists "taking on new credit facilities simply because they are offered" among the mistakes to avoid.

Borrowing your down payment

An unsecured line can fund a down payment on an insured mortgage in a narrow case. CMHC allows this kind of non-traditional source on 1- or 2-unit homes with 5% to 9.99% down, for borrowers with a strong credit history. The repayment counts in your TDS, and the insurance premium rises: CMHC charges 4.50% instead of 4.00%. Sagen and Canada Guaranty have similar programs.

A line of credit is not guaranteed money. A product page describes an ordinary day, and the agreement describes a bad one. We could not find published personal line agreements for RBC, TD, BMO or Desjardins, so read yours when you get it. Here is what two published agreements say.

• Scotiabank (agreement effective March 4, 2025): it can reduce your limit, including to zero, for any reason without prior notice, even if you are not in default. It can block access to an inactive account, meaning no transaction, including a payment, for 12 months or more. It can cancel without a reason on 30 days' written notice.
• CIBC (terms dated June 2022, which may have been updated): you must repay your debt when it is due or immediately when CIBC demands it. It can decrease your limit, including to zero, even if your payments are up to date.

So not every line can be called in overnight, but every agreement we read lets the lender shrink or stop your access without you doing anything wrong. We could not find Canadian data on how often banks actually cut personal lines. Treat it as a risk you cannot measure, not a sign that it happens often.

Your rate can change too. When prime moves, a variable rate moves with it, and some agreements also let the lender change the spread.

What protects you

• A bank cannot raise your personal line's limit without your express consent, and simply using the line does not count as consent.
• A bank must tell you in writing about changes to the terms it disclosed, no later than 30 days after the change is made. You may only hear about a change after it happens.
• Your bank must send an electronic alert when your available credit falls below $100, or an amount you choose.
• Complaints go to your bank first, and it must give you a written response within 56 calendar days. If you are not satisfied, you can go to the Ombudsman for Banking Services and Investments (OBSI). OBSI can recommend up to $350,000. Its decisions are not binding, but it makes public any firm that refuses.
• Credit unions are generally regulated by the provinces, so these federal rules may not apply. Ask your credit union how complaints and changes work.

What does not carry over from credit cards

The 21-day interest-free period and the $50 cap on unauthorized use are written for credit cards. They do not apply to a line of credit. If your line comes with cheques or an access card, check the agreement to see who pays if they are lost or stolen.

If you live in Quebec

Quebec's Consumer Protection Act treats lines of credit as open credit contracts, which adds some protections. A lender can only raise your limit at your express request. If you share a line, you can be released from future use by notifying the lender in writing and proving you told the other borrower. Quebec's 5% minimum payment rule is for credit cards, so it does not apply to lines of credit.

FCAC suggests saving 3 to 6 months of expenses or income for emergencies. It also says a personal line of credit can be used for unexpected expenses. We think the two work best as layers: cash first, then a line if the cash runs out and you have a way to repay it.

Scotiabank's product page says a line could be useful as an emergency fund. Its agreement lets it cut the limit to zero without notice. Both are true. The first describes an ordinary day, and the second describes the kind of day a backup is for.

The best argument for applying early is timing. Approval depends on your income and credit, so it is easier while you are working. That gets you in the door, but it does not lock the money in.

A backup line can make sense if

• Your income is steady and your credit is in good shape, so you can get a fair rate.
• You already have some cash saved, even if it is not yet 3 to 6 months.
• The line has no annual fee and a modest limit, based on what you could repay.
• You own a home or face other large one-off costs that your cash would not cover.
• You would use it rarely, with a clear plan to repay it.

Skip it if

• Your budget already runs short each month. A line will not fix that. It will turn the shortfall into debt.
• You have paid down debt before, then borrowed it back up.
• You want it to build credit or to help with a mortgage.
• You are between pre-approval and closing on a home.

Easy access is a risk of its own. FCAC warns that it can lead to serious financial trouble if you do not control your spending. In its 2019 research on home equity lines, 27% of users paid only interest most months or every month, and 19% borrowed more than they intended, although 71% used their line mainly or only as intended. That research covered HELOCs, not unsecured lines, and we found no equivalent Canadian figure for unsecured lines.

Other ways to cover the same job

A line works best for a one-off cost with a known repayment source and an end date. It works badly for anything that repeats.

Reasonable uses

• Paying off expensive credit card debt, if you stop adding to the card. Moving $10,000 from a 21.35% card to an 8.36% line would save about $1,300 in interest over a year.
• A short, planned bridge, such as tuition or a repair, when you know where the repayment will come from.

Poor uses

• Covering a regular budget shortfall. The balance grows and nothing changes.
• Investing with borrowed money. A rate increase and a market drop can hit together.
• A down payment, unless you have priced the higher premium and the effect on your TDS.
• A business you own, if your agreement bars it. CIBC's does.
• A tax bill, in many cases. CRA charges 7% on overdue taxes from October 1 to December 31, 2026, which can be lower than an unsecured line's rate. That compares interest only, so check whether any penalties apply to you.

Treat every draw like a loan

1. 1Before you draw, write down the amount, where the repayment will come from, and an end date.
2. 2Set up an automatic payment above the minimum.
3. 3Keep the line away from your chequing account if you can, so it does not become an overdraft you stop noticing.
4. 4Ask for a limit you could repay, not the most you can get.

Tax

Interest on money you borrow for everyday spending is not deductible. It can be deductible if the borrowed money is used to earn income from a business or investments, and you need to be able to trace that use. Money that can only earn capital gains does not qualify. Interest on money borrowed for an RRSP, TFSA, FHSA, RESP or RDSP is not deductible. The student loan interest credit covers government student loans, so interest on a bank student line does not qualify.

Joint lines

If you share a line, each of you owes the full balance, and at some banks either of you can borrow without the other. A separation does not change what you owe the lender, so talk to the lender right away if you split up.

Balance protection insurance

Lenders often offer credit or balance insurance when you are approved. It is optional, and federally regulated institutions cannot pressure you into it. It pays down the debt, so the money goes to the lender and not to your family. FCAC warns about exclusions such as pre-existing conditions, being fired with cause, resigning and contract work. Ask for a sample certificate and compare it with any life or disability insurance you already have.

Questions to ask before you sign

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