I recently received an email from a reader of this website asking about getting a loan for an RRSP (Registered Retirement Saving Plan) or RSP (Retirement Savings Plan) to help re-establish credit after bankruptcy. The catch is, to be approved, you need good credit! You may have noticed that in all of the articles I have published here the After Bankruptcy Canada website, I have not mentioned getting an RRSP loan. Why? Because I couldn’t get one. It’s really hard to get approved for one when you have a recent bankruptcy!
Why Is It So Difficult To Get An RRSP Loan?
You would think it would be easy to get a loan for an RRSP since the loan could be secured with the RRSP itself. Kind of like in the olden days (the 1970s and 1980s) when it was common advice to go borrow $1000 from your bank and then pay it back to establish payment history. There are many well meaning, but uninformed or misguided individuals who tell everyone to go get an RRSP loan, using the same logic as getting a bank loan, back in the day,and paying it back for the sake of establishing credit.
What Worked Before Won’t Work Now
Well… things have gotten a bit more sophisticated since then and credit guidelines are much tighter! If you’re a regular reader here, you will recall me telling you how hard it was to just get a secured credit card. After all, what could be easier: you give the bank a $500 deposit for a credit card with a $500 credit limit and they hold the deposit as collateral. (Note this is a secured credit card that reports to the credit bureaus, not a prepaid card which is more like a debit card that has a Visa or MasterCard logo, which does not report to the credit bureaus, and thus, will not help you rebuild your credit).
How The Lenders See Risk In An RRSP Loan
It seems to be the same thing with getting an RRSP loan. As strange as it may seem on the surface, there still is a bit of risk involved in extending any credit, even if it’s secured. And in this day and age with our weak economy going through a recovery mode of its own, credit guidelines are much stricter – especially if you have a recent bankruptcy.
I actually did attempt to get an RRSP a little over a year ago, based on the advice of several people who told me that the loan would help re-establish my credit. But, these must have been people who do not have a bankruptcy showing on their credit reports. I’ve learned to not accept every bit of advice at face value. I tend to put more credibility in advice given from someone who has helped ex-bankrupt Canadians, or who is actually in recovery mode from bankruptcy himself or herself.
Think Before You Apply For That RRSP Loan
When I was attempting to get an RRSP loan, I never actually filled out an application, since by doing so, it would result in a hard inquiry on my credit report, which would in turn, stay there for 6 years and lower my credit score since I initiated the inquiry due to seeking credit. Instead, I “interviewed” bank managers and loan officers. Some were able to tell me right away, with absolute certainty that I would be declined if a bankruptcy was showing on my credit report. Some weren’t sure, so I asked other people at the same organization until I found out the answer, which was usually the same. If they weren’t sure or couldn’t guarantee anything without filling out a credit application, I thanked them and went on to the next place.
You’ll Probably Be Rejected!
Eventually I ended up at an investment firm that seemed quite promising. However, after meeting face to face, I was once again told that I would not be approved for a loan. But, this place told me that I would be better off with mutual funds since I was considered a contract worker, just like someone who is self-employed. For all intents and purposes, I was employee. My hours were set, work was provided to me as were tools and supplies. However, my employer chose to pay me on contract to save money with payroll expenses and matching employee contributions to the pension plan, workers compensation, etc. So, that made me a contract worker, in the same category as self-employment. That’s a story unto itself, but suffice it to say that I was informed that RRSPs are better suited to people who are employees at a job where they receive a T4 at the end of the year. In my case, mutual funds were suggested.
The only way I could acquire mutual funds was to pay for them myself. Of course, that wouldn’t directly help rebuild my credit. No credit was being extended to me. However, I thought as an investment and a forced savings, I should set aside $100 a month via automated bank withdrawals to put towards mutual funds. You could pay cash for your RRSPs too, which is good since you’re adding money to your retirement savings, but just remember that it won’t directly help increase your credit score. Many people will consider it an asset, and it will be even better in the long term, but you likely won’t get any immediate benefits from it.
Incidentally, after seeing my mutual funds go up and down in value, I decided to cash out after 13 months. I ended up making an extra $73. In the end, I got $1373 after putting in $1300. Not bad. I could have done worse. But I’m getting better educated on investments. Depending who you ask, some experts will advise again mutual funds, saying they are for people who are not very investment savvy. As this is not an area of expertise for me, I won’t go any further with it and will let you decide for yourself if mutual funds are right for you.
An Alternative To An RRSP Loan For Ex-Bankrupt Canadians
But what I can tell you is that you probably won’t be approved for an RRSP or mutual funds loan if you have a bankruptcy appearing on your credit reports. What do I suggest? I believe the best approach is to go after a credit product you know you will be approved for, like a secured credit card. Peoples Trust MasterCard approves just about everyone in Canada who is over 18, is not an undischarged bankrupt and who sends in at least $500 for a deposit. I have been using a Peoples Trust MasterCard for over a year now and paying on time. It reports to the credit bureaus and I have seen my credit score go up. Home Trust has a secured Visa card available to most residents of Canada. I could not get one when I lived in Quebec, but now that I moved to Ontario I became eligible. I now have a Home Trust Visa card and will report back on it after I use it for a few months.
Do I recommend any other secured credit cards? No. There is a Capital One secured credit card. I have heard mixed reactions about it, and feel that between already having two secured credit cards, a car loan and a cell phone plan reporting to my credit profile, I have sufficient credit at this time.
What about other secured credit cards? Sure, most banks offer them too. But if you’ve read some of my other articles on secured credit cards, you’ll remember that it’s virtually impossible to approved for one, even if you are a long time customer of that bank in good standing. Until I find out more about RRSP loans and actually finding one that a person with a bankruptcy can get approved for, my best advice is to save up $500 for a deposit on a secured credit card. That may be the only form of credit you can get right now.
What If I Don’t Have Any Money Saved?
But what if you don’t have $500 for a deposit on a secured credit card? SAVE UP! I had to save up to have enough for a $500 deposit on each of my secured credit cards and down payment on my car. As an ex-bankrupt, we are not afforded the luxury of unsecured credit cards, zero down financing or unsecured RRSP loans. We have to work a little harder than everyone else. Even if you have to save $25 per week, do it. That’s $100 a month, so in 5 months you’ll have enough for a deposit on a secured credit card. Is that too long to wait? Well, if you don’t save, think of how much longer you’ll have to wait. Your credit won’t rebuild itself! If you’re really committed to rebuilding your credit after bankruptcy, you’ll find a way to get the money. Save up. Wait for your income tax refund. Sell something you don’t need. Maybe you’ll get money as a gift on your birthday. Get an extra part time job.
There’s more than one way to get the money for a deposit on a secured credit card. Then in a few years (probably once the bankruptcy no longer shows up on your credit reports), and with the good payment history you’ll have by making timely payments, your credit should be good enough to get an RRSP loan. This may not be what you wanted to hear, but in this economy, and for someone recently bankrupt, that’s the reality of it.