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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Tell us about Tracy and Gil's "boot camp" experience so far.

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.

So, what did they learn from this effort?

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.

What's next in terms of their credit cards?

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!

As is the case in many families, Gil and Tracy do not want their five daughters to start adulthood with a mountain of student loans, but you say they could actually be creating a bigger burden on their kids down the road. Explain.

Unfortunately, by putting their kids' education expenses above saving for their own retirement, they are actually doing more harm than good. While Tracy and Gil took advantage of a federally sponsored Parent Plus loan to help their eldest daughter, Gina, cover the costs of her higher education, it has left them with outstanding loans of more than $50,000.

Time and again, I see parents make the same decision and sacrifice their own savings to cover the costs of their kids' education. The issue is that while your child can take out a student loan and have their whole careers ahead of them to pay this off, there are no loans for retirement. Although Parent Plus loans are not transferable, I strongly encourage Gil and Tracy to work with Gina on a repayment plan in which she is making a portion or all of the monthly payments, so that they can put their money towards saving for their own retirement.

As a result of this "boot camp" experience, Gil and Tracy have recently had some pretty frank conversations with their children about their finances and there are probably more to come, right?Like all parents, Gil and Tracy want to give their children all the possible comforts of life and shield them from tougher topics, but as a result, they have been slowly digging themselves into a mountain of debt. Over the past 18 months, they hit some financial hardships and yet they continued to try and provide their girls with the luxuries of life, including cell phones, cars, dinners out and tuition money.

With the eldest two daughters being 18 and 19 years old, they are more than ready to become financially independent, and with a little encouragement, Tracy and Gil have recognized this and are working to cut the purse strings. Their daughters have reacted to the realities of this in different ways, but in the end, it is the right decision for everyone.

So, what is next for the Vasquez family?

By just taking these first few steps, Gil and Tracy are committed to turning around their finances and getting back to a cash-only spending policy. In the coming weeks, we are hoping to help them uncover other areas of potential cost savings -- including consolidated auto insurance policies -- and determine if the terms on their existing loans, such as their mortgage and car loans, can be improved by refinancing.

We have also asked them to closely track their spending to figure out areas to cut. While Tracy really enjoys feeding her creativity through craftwork and the kids enjoy their meals out, reducing their spending in these areas could lead to significant savings. For example, by spending just $50 a week less in these areas, they will have $200 more a month -- and $2,400 a year -- to put towards debt reduction.