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Credit Card Debt from Christmas?

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When January comes around if you are like most Canadians, you will have a sizable credit card bill and you will want to contribute to your RRSP. But like many Canadians you may not do the RRSP, because you want to pay off that credit card debt. After all you are supposed to pay off high interest rate debt first!
 

So, how can you do both?

If you are in a high tax bracket and have RRSP room, it can work. This will involve these steps:

1. Take out an RRSP loan,

2. Contribute to your RRSP and use your tax return to pay off your credit card,

3. Use what you currently pay on your credit card to help pay off the RRSP loan, and

4. Don’t carry a balance on credit cards going forward.

 

Why would you want to do this?

RRSP loans have very low interest rates, especially when compared to credit cards. Lower interest rates mean more money for you. Using this solution you can have an RRSP AND pay off credit cards. You also get money working for you instead of against you.

 

Cautions

  1. You could have an RRSP loan and credit card payments overlap for several months, but you can usually defer payments on an RRSP loan.
  2. There are risks associated with borrowing to invest; you will have to repay your RRSP loan even if your investments go down.
  3. Make sure you have sufficient cash flow to support regular loan payments.

Please see an advisor before enacting this strategy. It is important to see if this is even right for you and you want to get sound investment advice. For instance, you may not want to use this strategy to buy junior mining stocks!

 

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