How the interest rate is calculated on my line of credit

Last week, I was doing a little happy dance because the interest rate on my line of credit (home to my remaining consumer debt) was reduced from 7.5% to 6%. Jacq from Single Mom, Rich Mom, one of my favourite bloggers out here in the personal finance space, asked “MCM, what do they base the LOC rates on? Mine is at 4.25% now I think, I’m not sure because I haven’t used it in forever – I’m with RBC.”

It was a question I didn’t ask myself. If it was a good enough question for Jacq to ask, I figured it’s most certainly a good enough question for me to ask.

Yesterday, I got my answer.  Seems there are three components for the CIBC to calculate the interest rate, as far as I understand it.

1.  The size of the LOC. I’m told if the loan is up to, let’s say 10K, there’s a range of acceptable interest rates.  If the loan is from 10-20K, there’s another range. If the loan is between 20-30K, there’s another. You get the idea. What I didn’t ask is how does the higher the loan impact the rate.

I have another LOC at Scotiabank, although I never think of it as a LOC, I think of it as a mortgage. At any rate, that loan amount is much higher than my CIBC LOC, and my interest rate is much lower, much like where Jacq’s is now.

2. Your credit score. In May, I checked out my credit score, and it was 790. The CIBC just ran a check, and it’s 727. Ooo, on the decline. I wonder why? I’m probably paying off my debt too aggressively to make me a good customer for the banks. I never carry a balance on my credit cards. I won’t sweat this one right now. My credit score is still great.

3. Secured versus unsecured. There’s obviously a different risk associated with secured or unsecured loans for the banks. If you’re not sure what the difference is between the two, here’s a snapshot. My LOC with CIBC is unsecured. On the other hand, my LOC with Scotiabank is secured.

I thought it was interesting that there are all these variables determining interest rate. I really only thought of one (credit score). Thanks to Jacq for asking it. I learned something finding the answer!

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