Understanding Lines of Credit as a Newcomer in Canada

Canada’s economy runs on credit, and banks provide a diverse array of credit products tailored to various financial needs. For most newcomers to Canada, your first experience with credit is in the form of a credit card, which offers a modest credit limit, but more importantly, a chance to begin establishing your credit history in the country.

As you settle into your new life in Canada, a credit card may no longer be sufficient to meet your financial aspirations. While loans and mortgages can serve specific purposes like car or home purchases, a line of credit is a versatile option that gives you more freedom and funds for various expenses. This article covers what a line of credit entails, the different types available, and how it can help newcomers with their financial goals.

What is a line of credit?

A line of credit is a flexible, low-cost way to borrow money from a financial institution. When you apply for a line of credit, you get approved for a certain credit limit or amount. However, you can use as much or as little of this credit limit as needed, depending on your current requirements. Moreover, you only pay interest on the amount you use.

As you begin making yourself at home in Canada, there may be several one-time or unforeseen expenses that you need to incur, such as furnishing your home or making a down payment on a vehicle. Or you may want to enroll in a higher education program to enhance your career prospects. A line of credit can prove beneficial in such situations, as it allows you to access revolving credit and repay it as convenient.

How do lines of credit work in Canada?

A line of credit provides immediate access to funds when required, much like a credit card with a credit limit. You can use as much of that money as needed and, as you pay it back, that portion of the credit limit becomes available to you again on a revolving basis.

Interest rates for lines of credit are generally lower than those on credit cards, and unlike with a credit card, the rate of interest on lines of credit is usually variable (linked to the bank’s prime rate). Moreover, interest is incurred only on the portion of the line of credit that you use, for the duration you use it for. You can pay off your balance at any time, but usually, a minimum monthly payment is required to cover the interest for the period.

Accessing funds from your line of credit is convenient, with several options including Automated Teller Machine (ATM) withdrawals, writing cheques, or making online transfers.

Use the RBC payment calculator to understand what your monthly payments would look like with a Royal Line of Credit.

The difference between a line of credit and a loan

While both lines of credit and loans fall under the credit category, understanding their differences can help you, as a newcomer, make informed financial choices. Here are some differences to keep in mind:

	Line of credit	Loan
Revolving versus non-revolving credit	Offers revolving credit. You can borrow against your credit limit and as you repay your balance, it becomes available for use again.	Offers non-revolving credit. You get the full loan amount and must repay in installments until you’ve paid off both the principal and interest.
Interest calculation	Interest	You must pay interest on the entire loan amount, regardless of whether you use it.
Payment timelines	You can pay down your balance at any time. However, you may need to make a minimum monthly interest payment.	You agree to a fixed payment schedule (monthly, bi-monthly, weekly, etc.) and your payments comprise a portion of the principal and interest.
Fixed versus variable interest rate	Variable interest	Fixed or variable interest

Secured vs. unsecured lines of credit

When you opt for a line of credit, you can choose one that’s secured against an asset or an unsecured one. Each type has its distinct uses, features, and eligibility requirements.

Secured line of credit

These lines of credit are secured against some form of collateral, such as your home equity or investment portfolio. While a secured line of credit typically offers a larger credit limit at a lower interest rate, newcomers may need time to acquire qualifying assets in Canada.

For instance, homeowners may be eligible for a secured line of credit with a credit limit of up to 65 per cent of the value of their home equity.

Unsecured line of credit

This type of line of credit does not require collateral, and the lender will determine a suitable credit limit based on your credit history and financial standing.

Initially, until they can build a good credit history in Canada, newcomers may not be eligible for an unsecured line of credit or may qualify for a smaller credit limit, with interest rates higher than secured lines but lower than credit cards.

Types of lines of credit in Canada

There are several lines of credit options available in Canada for different financial needs. These include:

Personal line of credit

This line of credit may be secured or unsecured. It is suitable for recurring, ongoing or unforeseen personal expenses, as you can use the money for anything. Since you only need to pay interest on the portion you use, a personal line of credit can be used to consolidate and pay off high-interest debt. As a newcomer, you can also use a personal line of credit for down payments on vehicles or homes or for emergency expenses.

To apply for a personal line of credit, you’ll typically require identity documentation, proof of your family income, details of existing debt, and collateral documentation if you’re applying for a secured line.

Some individuals may also get pre-approved for a personal line of credit by their bank, based on the duration of their banking relationship with the bank, assets, and credit repayment history. In such a case, the bank may not run a credit check on you, and you’ll have the option of accepting or rejecting the line of credit.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit, also known as HELOC, is secured against the current value of the equity you own in your home. HELOCs offer a substantial credit limit at a relatively low interest rate.

However, as a newcomer, it may take time to purchase a home and grow your equity in it by paying down your mortgage balance. You may only be eligible for a HELOC when you have at least 25 to 35 per cent equity in your home.

You may be able to use a HELOC for larger expenses, such as setting up a business, purchasing a car, renovating your home, or putting a down payment on a second home.

To apply for a Home Equity Line of Credit, you must provide the financial institution with your identity proof, homeownership documentation, home valuation (some banks may do an independent valuation), and mortgage documents.

Student line of credit

Student lines of credit are low-interest credit options specifically designed for Canadian citizens and permanent residents pursuing post-secondary education. Unlike other line of credit products where you can repay your balance at any time, you must begin repaying the principal you’ve used on your student line of credit within a certain period after graduation. You must pay interest on the portion of your credit limit you utilize during your study period.

To apply for a student line of credit, you must provide proof of identification, confirmation of your enrollment in a Canadian school, education cost estimates, proof of financial resources, such as scholarships or RESPs, and proof that you’re a citizen or landed immigrant in Canada. If you don’t have sufficient credit history in Canada yet, you may also need a co-signer for your application.

Business line of credit or business operating line

A business line of credit, also known as a business operating line, can help entrepreneurs and business owners manage or supplement their working capital to effectively handle fluctuating expenses. It also gives them access to additional capital to fund expansions, asset purchases, and other costs.

Benefits of obtaining a line of credit as a newcomer in Canada

Here are some advantages that make lines of credit a valuable credit option for newcomers:

• Gives you access to credit when needed: It can often be hard to get credit immediately in case of an unexpected or large financial need. If you have a line of credit, you have ready credit at your disposal, and you only pay interest on the money you use.

• Lower interest rates: Compared to credit cards, the interest rates on lines of credit are usually much lower. In fact, a line of credit can even be used to consolidate and pay off credit card debt and reduce your overall interest payments.

• Revolving credit limit: A line of credit allows flexibility in using, repaying, and reusing the available credit limit without the need to reapply every time you require credit.

• Flexible repayment schedule: Except for student lines of credit, lines of credit offer the freedom to repay your balance at any time without a fixed payment schedule. However, you must still pay off your interest on a monthly basis.

• Convenience and ease of use: You can access funds from a line of credit through ATM cash withdrawals, cheques, or online transfers.

• No annual fee: Most lines of credit don’t have an annual fee, and the only additional cost is interest on the credit balance you utilize.

• Enhances your credit portfolio: A diverse mix of credit products can help improve your credit score, provided you make payments regularly.

Does a line of credit impact your credit score?

Obtaining a line of credit can positively influence your credit history, as long as you manage your debt responsibly. Adding a credit product, such as a line of credit, helps you diversify your credit portfolio and also increases your overall credit limit. If you keep your spending patterns stable, your credit utilization ratio will decrease, resulting in an improvement in your credit score over time.

Do I need a line of credit if I have a credit card?

Although a credit card is usually the first credit product newcomers qualify for when they come to Canada, it is not the cheapest form of credit. As you settle into your new country, having access to multiple forms of credit can help improve your credit history.

A line of credit is a popular choice, as it gives you access to a larger credit limit that you can use and repay as needed. Moreover, a line of credit typically has a significantly lower interest rate compared to credit cards and can be used for larger purchases or unforeseen expenses which you may not always be able to pay off in full within a short period (such as by your credit card’s payment due date).

Adding a line of credit to your credit mix can increase your overall access to credit and reduce your credit utilization ratio, which in turn, can lead to an improvement in your credit history.

How to apply for a line of credit in Canada

Newcomers to Canada can apply for a line of credit or get pre-approved for one by their bank once they’ve built a good credit history or have an asset that can serve as collateral for a secured line of credit (such as a home). Usually the financial institution will do a credit check and seek certain financial documents before they approve your request for credit.

To apply for a Royal Line of Credit, call 1-866-704-7126 to speak to an RBC credit specialist or visit a branch. 

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