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How the debt ceiling affects the average American

Nancy Marshall-Genzer Jun 25, 2011

How the debt ceiling affects the average American

Nancy Marshall-Genzer Jun 25, 2011

Tess Vigeland: Negotiations over raising the nation’s debt limit and cutting the deficit are in overdrive. If wrangling over the debt ceiling makes your eyes glaze over, it’s probably because you’re thinking, “That really doesn’t have anything to do with my daily existence.” But if Congress fails to raise the debt ceiling by an August deadline, your wallet could, indeed, take a hit.

We asked Marketplace’s Nancy Marshall Genzer to explain.

Nancy Marshall Genzer: Patty Crowe lives in northern Virginia. She’s agreed to sit down and talk about her financial life — and how it intersects with the debt ceiling debate. I brought Stuart Ritter with me. He’s a financial planner with T. Rowe Price.

Genzer: How are you?

Patty Crowe: I’m well, thank you.

Genzer: Very nice to meet you, this is Stuart Ritter.

Stuart Ritter: Hi Patty, nice to meet you.

Crowe: Nice to meet you too. How are you?

Genzer: Oh, what a gorgeous house.

Ritter: Wow.

As we walk in, we admire the paintings lining the walls, mostly done by Crowe’s husband, Ira, an artist and carpenter. She’s a publisher. Their story is probably a lot like yours: They have a mortgage and some other debt. I ask Crowe what she thinks would happen to her finances if Congress doesn’t raise the debt ceiling and the U.S. defaults.

Patty Crowe: I hadn’t given it a thought. I knew it would affect the country, but it never occurred to me that it might affect me personally or how it would.

How much you could be affected by a U.S. default depends on a number of things — where you live, what kind of debt you have. The financial planner, Stuart Ritter, says the government would have to pay higher interest rates if it defaulted. And those higher rates would be contagious, pushing up borrowing costs for consumers.

Ritter: All of these interest rates are interconnected. It’s not as if each is existing in isolation of the other. So generally, interest rates overall will move up and down together.

Patty Crowe cringes as Ritter says this. Like many consumers, the Crowes rely on credit cards when things get tough. Their son had brain surgery a few years ago. Their insurance didn’t cover everything. They used their credit cards to pay the hospital bill. Crowe won’t say how much they owe. Ritter tells her, pay down that credit card, because the bank will probably raise that rate if the government defaults.

Ritter:If interest rates do go up, that one would probably react most quickly. So the less you have of that credit card debt, the less that kind of thing will affect you.

Ritter advises Crowe to pay down the credit cards with her home equity line of credit. That has a lower interest rate right now. In fact, he says, the Crowes should always use their line of credit in emergencies, like a drop off in business. Crowe’s publishing company wasn’t affected much by the recession. She mainly prints textbooks, which are always in demand. And the Washington area never felt the worst effects of the recession. Ira Crowe’s carpentry business did slow down a bit last summer. It’s picking up again, but now he needs a new work van.

Crowe: So, it’s not a question of do we want to, but will we have to or he’ll be carrying ladders on his back.

So, the Crowes will be shouldering a new car loan in the next few months. And they could pay a higher rate because of the shadow of default. Stuart Ritter tells Crowe, prepare for that possibility. Now.

Ritter: Sit down and go through a prioritization process. What is it that we’re going to have to give up if we’re going to be spending more money on the loan? Where is that extra money going to come from?

Patty Crowe says she’ll cut back, but she’s not sure where. The Crowes don’t have a lot of extra cash. They’re in their 50s and haven’t saved much for retirement. Investments wouldn’t help them anyway during a default. Stocks would take hit. So would the dollar — and that has immediate implications for the Crowes. Investors would dump the dollar and switch to commodities like oil, bidding up the price. Gas would go up.

Patty Crowe says that wouldn’t make her husband, Ira, happy. He drives a lot for his business.

Crowe: He’ll spend maybe a hundred dollars a week on gas. So, he complains about it. It’s a big bill.

It’s dawning on Patty Crowe that a default could affect her more than she thinks.

Crowe: You know the truth is, it’s the little things that add up to becoming big things that make life harder, financially, sometimes. So, you know, I can see that it could have an effect.

It’s just this kind of realization that puts a dent in consumer confidence. A default on top of that could push us back into recession — just when consumers like Patty Crowe are trying to find their financial footing.

In Washington, I’m Nancy Marshall Genzer for Marketplace Money.

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