Boot Camp Debt Busting: Next Steps

Nov. 12, 2007 — -- Mellody Hobson, "GMA" financial contributor and president of Ariel Capital Management, helped Gil and Tracy Vasquez, a couple from Gurnee, Ill., get a grip on their mounting debt and inability to get ahead financially.

Hobson followed up with the family to see what they learned and what kind of changes they made. "GMA" will be checking in with the Vasquezes occasionally to see how they're keeping up with Hobson's plan.

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In one week alone, Gil and Tracy have made tremendous strides to get their financial house in order, and as you will see, taking the first step is often the most difficult part. While Gil and Tracy were more organized than most people when it came to tracking their bills, they still didn't have a clear understanding of their full financial picture when we started this process.

For example, they did not even realize how many credit cards they had between them. And they had paid little attention to the annual percentage rates on their various cards -- rates which were significantly adding to their debt load with each passing month. They were trying their best to make their payments on time, but were only able to pay the minimum. So, in an effort to get them on firmer financial footing, our first step was to reduce the number of cards and if possible, renegotiate the APRs.

In reaching out to the card companies, Gil and Tracy learned some valuable insights, and their confidence grew with every call. One important lesson: If you acquire a number of credit cards in a relatively short period of time, as Gil and Tracy did, it generally is a sign of financial distress or poor financial decision-making, and this can negatively impact your credit score.

As a result, you will be considered a "high risk" client which almost always translates into a higher APR. In recognizing that these cards were not helping them in their effort to gain financial solvency, Tracy and Gil willingly went forward and committed to stop using their credit cards and as an extreme measure, even cancelled a few with the highest APRs to eliminate the possibility of wracking up more debt -- a huge step for them.

In an effort to maintain and improve their credit scores, Tracy and Gil need to set about the task of paying off all of their credit card debt, and ensuring that all payments are made on time. They also need to pay more than just the minimum each month, and focus on the cards with the highest interest rates first. For example, they have one card with a balance of nearly $1,500 and are paying an APR of 27.99 percent. If they were to only pay the minimum on this card, it would take them over 75 years to pay it off, and they would end up paying $16,170 in interest alone!