Lawmakers on Capitol Hill are facing renewed pressures to increase how much money the federal government can borrow — or get rid of those caps altogether. If they don’t, analysts say the U.S. economy, financial system, retirement checks and American livelihoods could be in serious trouble, at least temporarily.

The U.S. hit its $31.4 trillion debt limit on Thursday, leading the Treasury Department to start employing “extraordinary measures” to help the federal government avoid defaulting on its obligations.

To address the issue, Congress will have to either vote to raise the limit or suspend it altogether. Lawmakers haven’t been shy of taking either of those steps before. Since 1978, Congress has either adjusted or suspended the statutory debt limit 61 times, according to the Congressional Research Service.

The clock to avoid default, however, is ticking. Treasury Secretary Janet Yellen estimates the Treasury Department’s temporary measures to continue covering the federal government’s bills are unlikely to be exhausted before early June, though there’s “considerable uncertainty” about that timeline.

What is the debt ceiling?

For centuries, the U.S. has spent more money than it takes in. The Treasury Department finances that extra spending by selling government securities. Yet, lawmakers don’t just hand the agency a blank check. Instead, Congress since 1917 has limited how much the Treasury Department can borrow, so it can pay for the programs it’s legally obligated to fund: from Social Security and Medicare, to military salaries, tax refunds, national interest payments and more. That guideline is known as the “debt ceiling.” Think of it like the credit limit on a credit card.

But unlike what happens when you use up your credit line, Congress isn’t cut off from spending once it reaches that limit. Lawmakers can keep committing to new spending, after which the debt ceiling isn’t automatically raised.

“It has failed miserably,” says Mark Hamrick, Bankrate senior economic analyst and Washington bureau chief, referring to the debt ceiling. “It is akin to having me promise to pay you dollars, and then raise the threat of failing — or fail — to make good on that without funds. All of this is completely unnecessary and self-inflicted.”

Political gridlock can often make the situation more dire. House Republicans, led by newly installed Speaker Kevin McCarthy (R-Calif.), have declined to approve another spending increase without concessions from the Democrat-led Senate and President Joe Biden. Yet, Biden administration officials have stressed the president isn’t interested in negotiating or using the issue as a “political football.”

The U.S. has never defaulted on its debts, but each day lawmakers don’t act could raise the risks. Yellen has said the U.S. defaulting on its debts could cause “irreparable harm” to the U.S. economy, with borrowing rates on things like credit cards, mortgage rates and auto loans skyrocketing. Those consequences would add to the challenges the U.S. economy had already been facing before any debt limit showdown showed up: a slowing economy, rising interest rates and high inflation.

“Americans should avoid the temptation to think this is a Washington-only problem,” Hamrick said. “If the government were truly to default on its debt, there’s widespread agreement that it could cause a recession, cause interest rates and borrowing costs to increase, set off a sharp selloff in stocks and throw many Americans out of work.”

Here’s how your wallet could be impacted if Congress fails to raise the debt ceiling in time — including if it defaults.

1. Government obligations such as Social Security or Medicare disbursements could be at risk

If the debt ceiling binds, the Treasury Department might decide to delay — or even temporarily halt — payments to millions of Americans and government agencies. That could be anything from Social Security checks, Medicare disbursements to health care providers, payments to agencies and state and local governments, as well as military and contractor salaries.

That was at least part of the Treasury Department’s contingency plan published during the 2011 debt ceiling standoff, according to Louise Sheiner, policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. The agency wanted to prioritize making interest payments and avoid default.

“The Treasury market is viewed as the most liquid and the safest in the world, and it’s a huge benefit to the U.S,” she says. “The idea that you would undermine those benefits and undermine the whole financial system of the world, which depends on Treasurys to operate, has much larger complications for the economy, than, what at the beginning, is a few days’ worth of delays in [entitlement] payments.”

The Treasury Department so far hasn’t released a contingency plan for the 2023 stalemate, but Yellen implied during the last major debt ceiling showdown in 2021 that the protocol could be the same.

“In a matter of days, millions of Americans could be strapped for cash,” she wrote in a Wall Street Journal op-ed from September 2021.

2. Buying a home, car or credit card borrowing could get more expensive

The federal government is able to borrow at a relatively lower interest rate than other governments in the world because Treasury securities are viewed as a safe and liquid investment. But that’s contingent on the federal government never defaulting on its debts.

Once that view is upended, however, investors might demand a higher premium to protect themselves from risk. Leading up to the event, they could start dumping Treasury securities out of fear that the U.S. government might not be able to pay them back. Any Treasury security sell off would cause yields to rise, bringing up borrowing costs on a wide array of loans, from the mortgage rates that are directly tied to the 10-year bond, as well as credit card and auto loan rates. Borrowing costs have already been on the rise thanks to the Federal Reserve’s ongoing efforts to cool inflation.

“It’s economic disruption,” says Scott Clemons, chief investment strategist and partner at Brown Brothers Harriman. “If you were in the middle of trying to get a mortgage, it would be more expensive to accomplish that. If you’re a small business trying to get a loan, it would be harder. When I’m not sure what the Treasury market is going to do, it makes it really hard for me to lend money because of all of the uncertainty.”

Those consequences could prove to be long-lasting, especially if the fear of another default remains in the back of investors’ minds. Higher interest rates wouldn’t just make the U.S. a more expensive place to live for Americans but could also make both new and outstanding debts costlier.

“Treasury bonds have been regarded as risk-free assets because of the stability of the U.S. government and its solid track record in paying its creditors,” Hamrick says. “An unprecedented default would turn that world upside down, doing great harm to the nation’s reputation and ability to take on additional debt.”

3. Stock prices could sink, threatening companies’ bottom lines

If the debt ceiling were to bind, markets would likely whipsaw, potentially enduring immediate and steep losses that might take a while to recover — even if the situation is quickly addressed.

From April to August 2011, at the height of a similar debt limit debacle, the S&P 500 tanked 31 percent. By the end of that year, the index only recovered half of the ground that it lost.

All of that could threaten corporate profitability, and firms that have increased exposure to government spending might take an additional hit. Those could be firms that have contracts with the federal government, as well as insurance firms that derive a certain portion of their revenue from Medicare payments.

“As with the previous experience, if the U.S. were to flirt with default or even enter that mode, it would be appropriate to expect another sharp downturn in stock prices among other negative developments in financial markets,” Hamrick says.

4. The government could default on its debt, triggering a recession, job losses and income disruptions for millions

The obvious concern with failing to raise the debt ceiling is that the government could default on its debts, meaning it isn’t able to make interest payments or pay back Treasury investors when their bonds mature.

Even if lawmakers quickly respond and a default is short-lived, it could have massive consequences. Experts describe default as having a ripple effect. Investors who aren’t paid back by the federal government might then be hard-pressed to fund their own obligations, with the circle getting bigger and bigger.

“Even if short-term, a default would provide a remedial course in global economics at a very hefty tuition,” Clemons says. “The U.S. Treasury market is like the circulatory system of the global economy.”

It’s often the Fed’s job to keep markets functioning. If credit markets were to seize up, the Fed might decide to temporarily sideline its quest to battle inflation in place of policies that can help revive markets. In those instances, officials might decide to provide funding to dealers in the market for repurchase agreements — or even purchase the defaulted, vulnerable debt, according to records of previous Fed discussions surrounding the debt limit in 2013.

On an individual consumer level, Americans might not be able to afford basic necessities if some form of income comes from the federal government. Demand could take a hit, and with company profitability already in question, hiring could hit a wall as well.

Previous simulations from Moody’s Analytics showed default could cost 6 million jobs, erase $15 trillion in household wealth and push up unemployment by almost 4 percentage points at the time. Those economic consequences could further devastate households who already lost $7 trillion in wealth last year, thanks to rising interest rates, Fed data shows. Meanwhile, joblessness is already projected to rise to 4.6 percent within the next 12 months, according to Bankrate’s Economic Indicator survey.

“The risk and fear of a federal default adds to uncertainty at a time when businesses and households are already dealing with an abundance of it,” Hamrick says. “It will weigh on financial markets and the economic outlook. As we know, recession worries are already elevated and this only adds to the reasons to be concerned.”

5. Even if the debt ceiling is raised in time, Americans could feel financial pain

Congress has always made a last-ditch effort to raise the debt ceiling and avoid default, but Americans might not go entirely unscathed.

During a similar 2013 debt ceiling standoff, yields on the Treasury securities that were nearing maturity rose between 21-46 basis points, in addition to stock markets experiencing volatility, according to a Fed analysis. The average 30-year fixed rate mortgage in the U.S. climbed nearly 124 basis points in the year, according to data from Freddie Mac.

When the federal government previously hit its credit limit in 2011, Standard & Poor’s nixed the U.S.’s top-grade “AAA” credit rating status.

“The political brinkmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” the agency said in a statement.

Yellen has repeatedly said she supports erasing the debt ceiling altogether to remove the risk of default every time the federal government approaches its borrowing ceiling.

“Ideally, we would return to the practice of lifting the debt ceiling without relying on extraordinary measures – which have become all too ordinary – and refrain from making the increase anything close to a last-minute showdown,” says Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “Politicians who are rightly worried about the nation’s unsustainable borrowing path should take a hard stance against new borrowing and oppose legislation that would add to the debt … rather than threatening not to pay the bills on borrowing that has already been incurred.”

Bottom line

What happens to the U.S. economy — and your wallet — depends on how long the stalemate lasts, whether the U.S. defaults and how long that default persists.

Americans looking to backstop their finances will want to make sure they focus on building up an emergency savings, even if it means cutting back on discretionary spending to free up some cash. Investors will want to take a long-term mindset and not overreact to short-term events in Washington that hope to be resolved.

“Clearly, not raising the debt ceiling is a bad thing for the economy, but there’s a lot of uncertainty — if this actually happened — of how it’s going to unfold,” Sheiner says. “Some scenarios are worse than others. None are good.”