A decade ago, Beau Humphreys was in deep financial trouble. At 28 years old, he had $40,000 CAD worth of high-interest debt, which was more than he made in a year.
He racked up a lot of that debt through online gambling. Humphreys went through periods where he got his debt down to $35,000 only to see it creeping back up again. Sometimes, he had to ask a friend to help him make rent. It got to a point where he decided to do something drastic.
Like a growing number of millennials, he filed a consumer proposal, which is a legal option, and an alternative to personal bankruptcy, to help him tackle his debt.
“It saved my life,” he said. “It was a scary time and I couldn’t even handle the minimum payments anymore. I ran out of balance transfer options, which are six months of no interest on a card and then on to the next, on eight different cards.”
Today, Humphreys is a personal finance coach, and it was his experience living without access to credit after basically going bankrupt that shaped his fiscal outlook today.
Both a bankruptcy and a consumer proposal negatively affect your credit rating and your ability to borrow in the future. In Humphreys’ case, it meant he had to live without a line of credit or regular credit card, for seven years. He says being forced to live within his means turned out to be the best thing for his finances in the long-run.
With the help of an accredited insolvency trustee, he struck a deal with his creditors and reduced his overall debt to $15,000, which he was responsible for paying down at $300 a month over the course of 50 monthly payments, over the span of four years.
His credit rating was downgraded to R7, which is very low, and that’s where it stayed for seven years. It’s barely better than the absolute worse credit rating, R9, which is what you’re given after declaring bankruptcy. According to financial comparison platform Ratehub.ca, people who choose one of these options typically have a very low general credit score, in the 300 to 599 range, out of a possible 900.
During those seven years, the only thing Humphreys could get was a secured credit card, whose limit is based on what you pay before you make a purchase—which isn’t exactly credit because there’s no loan involved. It looked like a regular credit card, but it couldn’t be abused the way an unsecured card could be. It helped him build up a credit history during the process.
Humphreys describes his years without credit as a time in his life when he was “in limbo.” He needed to track every dollar he had, which he did with a spreadsheet. His top priority was making sure he had the $900 he needed for rent in his bank account at the beginning of every month.
Budgeting at another level
According to Humphreys, that provided him with lots of practice doing something that many people don’t do when it comes to creating a budget—planning for the future, not just looking at what’s coming in the next few weeks.
“I projected what I needed for the next six months because what if something comes up that I’m not anticipating? I look at the rest of the year and what are my costs? I can’t ever go negative because I have no credit,” he explained. “You can’t just spend money the way you would with a credit card and pay it off later. You need to have the cash in your bank so you’re scrutinizing everything.”
A general rule of thumb when it comes to personal finance is that you should have the equivalent of at least three months’ worth of expenses socked away for a rainy day. That seemed too low for Humphreys so he aimed to have six months’ worth put aside. It took him years to be able to get there.
“People who aren’t in my situation have other options, like a line of credit, if they lose their job. I couldn’t have that, so three months saved didn’t seem like enough so I doubled it,” he explained. As his income increased over the years, the extra money went to his emergency fund.
One thing he felt he couldn’t do was move out of his basement apartment bachelor in Toronto. Dealing with a new landlord would mean a credit check—and few people would say yes to someone with his terrible credit rating.
There was a lot of saying no to social things as well. According to Humphreys, he had been trying to keep his spending in check before he filed, but with the spreadsheet, he found that there was more he could cut. “Going out for dinner or buying lunches all the time, dating anyone seriously. I didn’t do that between 2008 and 2011,” he said. “I probably had my guard up too. I worked on myself. It sucked, but there was no way I was going to get back in the hole again.”
Being constrained to live within his means turned out to be a blessing. He used that time to figure out why he turned to gambling when he was stressed. He was diagnosed with Attention Deficit Disorder (ADD) and put on medication that “changed everything.” Humphreys says he hasn’t had a gambling relapse since 2011, and he believes that will be his last.
He developed good habits for tracking, managing, and understanding his finances. An important part of that was a new way of looking at money, when credit wasn’t an option. “You’d think budgeting and tracking would be a burden, or restrictive, but it was actually freeing,” he said.
The credit trap
Seven years after he filed his consumer proposal, the day it was cleared from his credit report, Humphreys was doing some online banking when a pop-up let him know that his bank had pre-approved him for a credit card with a $16,000 limit.
Within a few hours of restoring his credit rating, he was being enticed to tap credit again. He took it because he needed to build up his credit rating but he uses it cautiously, paying off purchases within a few hours or days. He said he doesn’t wait until the statement comes in.
According to Humphreys, a casual relationship with credit fuels our collective addiction to it, because it’s easily accessible and offers a quick, convenient fix. But he’s proof that, with guidance, you can learn how to walk that fine line.
He got married five years ago and paid for most of his wedding in cash, which he says he recovered in presents. He has a four-month-old son and a new perspective on life. He feels that now, he’s in a unique position to teach people about how to look at credit as a double-edged sword—a financial weapon that can easily turn against you.
Humphreys wants people to understand that the corporations that provide credit, or stand to make money from our use of it, can’t be trusted to look out for our best interest.
“Why are we letting the people who sell us things, the banks, the retailers, decide our behaviour? It’s terrible. I want to know who came up with this concept that you can have whatever you want, as soon as you want it,” he said. “People should think of credit as something you don’t use all the time, but save for special occasions when you really need it.”
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