On January 18, 2013, House Republicans agreed to lift the debt ceiling for three months, stipulating that Congress pass a budget focusing on long-term debt reduction in the meantime. While this agreement is a sigh of relief for those fearing a national debt default, others are still weary of the temporary deal and its remaining threats to the average consumer.
For those in need of a debt ceiling refresher course, these are the basics:
- Federal law gives Congress the power to control spending by the government to pay for its programs.
- The debt ceiling was created during World War I as a way to expedite the spending process. Rather than approving or rejecting every spending measure, the Treasury Department operated under a “ceiling,” allowing them to funnel new money into programs already approved by Congress.
- Due to the increase in national debt, the Treasury has been hitting the top of the ceiling, unable to fund every approved program without exceeding the budget.
- Until today, House Republicans and Senate Democrats have been in a deadlock battle, Republicans refusing to raise the ceiling without a debt reduction plan in place, and Democrats fearing debt default without additional funds.
Politics aside, a few things hold true when it comes to a default in national spending:
The stock market could fall.
If we default on our national debt, the stock market will take a hit, affecting big businesses and individual investors alike. You’re bound to see a dip in your investments and retirement plans.
Hyperinflation may occur.
Defaulting on national debt is a huge blow for the U.S. dollar. The cost of living may go up, and the dollar could plunge further against other currencies.
Borrowing could stop.
Lenders may suffer under the threat of default as well. Without loans to fund their own expenses, handing out mortgages, student financing, and auto loans will stop, leaving Americans at the mercy of their savings accounts to supply their needs.
Unemployment may go up.
Many businesses rely on lines of credit to keep their day-to-day operations afloat—including payroll responsibilities. If your boss can’t make ends meet, your job may be first on the chopping block.
Interest rates could skyrocket.
If you are accustomed to charging items you can’t afford, read this carefully. Consumer credit is expected to rise in the case of default, covering expenses that Americans can no longer afford. Inflated consumer credit will increase the national debt yet again, causing interest rates to skyrocket and devaluing American bonds. FYI, bonds are usually part of 401(k) investments. Translation? As the national debt increases, retirement investments are likely to suffer.
What Can I Do?
What I’ve described may sound akin to financial Armageddon, an eventuality that would effectively cripple the nation. While we can hope for a better outcome, there are things you can do to prepare for the worst:
The personal threats listed above are obvious, and you’ll feel safer with some extra cash in the bank. Try to save 5 to 10 percent more each month to safeguard yourself in case of emergencies. Not only is this good credit repair advice, it will help your peace of mind as well.
Pay off debt quickly.
The threat of rising interest rates is real—and could also land you further in debt. If you are working on credit repair, it’s time to turn up the heat on your efforts. Cut back on unnecessary expenses and channel your savings into debt reduction. The result will reduce your credit utilization ratio and protect you in case interest rates go up. When it comes to national debt, reducing your own burden is no longer solely about credit repair. Take action and protect yourself from rising costs.
Stop charging unnecessary items.
We can all agree that too much debt is a bad thing. If you are concerned about the economy, it’s time to do your part. If you are prone to bad credit decisions, consider the impact on yourself and society. Carrying unmanageable debt has a negative effect on the economy, something we can scarcely afford. The moral: Think twice before you charge high balances with no hope of paying them off.
It’s clear that the debt ceiling poses risks for consumers on both sides of the political aisle. While the average person can’t evoke much change, you can write to your congressman to share your thoughts and take steps to protect your own financial stability. Do your best to weather the storm in the days ahead.