The Federal Debt Ceiling and Your Finances

Don't Let the Debt Ceiling Fall on You

Congress and the President narrowly avoided taking us over the fiscal cliff, at the end of 2012. Now, their inability to agree on raising the debt ceiling is threatening to throw the country into economic turmoil. The debt ceiling is the amount of money Congress and the President authorize the United States government to borrow to meet its debt obligations.

The government's debts include:

• Salaries for government employees and contractors
• Social Security and Medicare benefits
• Defense spending
• Interest on the national debt
• Tax refunds

If the debt ceiling is not raised, it will result in a partial shutdown of the federal government, seriously harming the economy. Failure to raise the debt ceiling won't have any impact on past spending — those commitments are already on the books. The debt ceiling debate is, therefore, intended to influence the debate over the costs of future laws, spending priorities, and tax policies.

Political Argument

The news is full of reports on the politics of the debt ceiling debate. Republicans aim to tie an increase in the debt ceiling to cuts in future spending. Democrats in Congress and President Obama oppose that. The President and the Democrats argue that raising the ceiling only allows the government to pay its bills that are already due and should not tied to future spending. Not raising the debt ceiling, they state, would be be catastrophic. The US government would default on some of its obligations, the government's credit rating would drop, and there would be a strong risk of recession.

Republicans argue that not controlling spending will only compound the problem. If government spending is not cut, it will lead to a cycle of increased debt and the need to raise the ceiling again, again, and again.

Both sides would have a more compelling argument, if they were consistent. Back in 2006, when George W. Bush was President, the two parties took the opposite side than they are taking now. The Democrats voted against raising the debt ceiling and the Republicans voted in favor of it. As a senator in 2006, Barack Obama said that raising the debt ceiling was "a sign of leadership failure."

If no agreement is reached and the government can't pay for all its obligations, the government's credit rating could be lowered, causing a hike in borrowing in costs and a slowdown in the general economy.

How the Debt Ceiling Affects You

It was the Fiscal Cliff last month and the Debt Ceiling this month. On the horizon is the need to pass continuing resolutions to allocate the government's budget. Given the divided government in the US, it seems reasonable for you to prepare to act as if this is not the last crisis we'll face.

At Bills.com, we focus on the consumer. We'll leave the political analysis to others. Our primary concern is how the debt ceiling debate can effect you. The general debate creates a climate of uncertainty. In uncertain economic times, you want to take steps to make your finances as secure as possible. We don't know exactly how the debt ceiling will play out, but the strategies that Bills.com recommends are sound, whether a crisis happens or is avoided.

You should take steps to improve your financial health now, in case the debt ceiling crisis causes any of the following:

1. Higher Mortgage Rates- If the government credit rating is harmed, you can expect the cost of borrowing to increase. Mortgage rates could rise, making it more expensive to buy a house or to refinance your current mortgage. Mortgage interest rates are currently at or near record lows. Look into refinancing now, to lock in a low interest rate, before rates rise.

1. Uncertain Job Market- Rising interest rates and tightening credit markets could cause employers to cut back on hiring and raises, or even cut hours or jobs. Establishing a rainy-day fund that covers six months of living expenses is always a good idea. It is even more important to have a cushion to fall back on the economy sours.
2. Costs of Credit Rise- If banks see their costs of borrowing increase, they will pass the higher costs on to you. Debt that you're carrying will cost you more to pay off. More of your monthly payment will go to cover interest, so it will cost you more and take you longer to pay off your debt. Get a plan in place to pay down your debt as quickly and inexpensively as possible. If your debt is overwhelming you, check out all the different debt resolution options and find the one that is best for your goals and individual financial situation.

There is no way to know how the debt ceiling negotiations will turn out. However, there are good reasons for you to weigh the negative consequences could hit the general economy and affect you and your family. President Obama gave a stark warning about what would happen if the debt ceiling is not raised, "Investors around the world will ask if the United States of America is in fact a safe bet. Markets could go haywire. Interest rates would spike for anybody who borrows money, every homeowner with a mortgage, every student with a college loan, every small business owner who wants to grow and hire. It would be a self-inflicted wound on the economy. It would slow down our growth, might tip us into recession, and ironically, would probably increase our deficit."

Take the right steps to improve your finances now, so you are prepared for the negative effects the debt ceiling crisis, or any future economic crisis, will cause.