If the U.S. defaults on its debt, the fallout could be huge for Americans.
And not just for retirees who may not get Social Security payments on time, or military veterans who may have trouble accessing benefits, or federal employees and contractors who may see a lag in payments owed to them. The cost of borrowing money would soar, making it harder for everyone to buy homes, cars, or pay off credit card debts.
It could make things worse for families at a time when many are already under financial strain. Inflation remains high, and Americans have racked up almost $1 trillion in credit card debt. That’s up 17% from a year ago, according to the Federal Reserve Bank of New York.
The Treasury Department says Congress has until June 1 to raise the federal debt limit. With negotiations still going and time running out, here are some ways to prepare your finances for a worst-case debt default scenario.
Tried and true basics
“We’re advising people to prepare for a potential default as you would for an impending recession,” says Anna Helhoski of NerdWallet.
That means tamping down on excess spending, making a budget, and shoring up emergency savings to cover at least three months of living expenses.
Since a debt default would likely send interest rates soaring, any credit card debt you’re saddled with may soon cost you more. Personal finance experts advise paying off those debts with the highest interest rates as quickly as possible.
While tightening finances, you may find that keeping up with car payments or a home mortgage will become a struggle. Helhoski recommends reaching out to lenders early to discuss any options for lowering payments, adding that the U.S. Department of Housing and Urban Development has “housing counselors who can also help homeowners explore any alternatives to delinquency and anything that would have long lasting impacts on their credit.”
The stock market will certainly take a hit if the U.S. defaults on its debt. At moments, the losses could seem significant to anyone with investments or retirement accounts.
But for those with diversified portfolios who aren’t nearing retirement, investment experts advise that you stay the course.
“Fight your worst instinct to act on the news,” says Teresa Ghilarducci, labor economist and retirement security expert at The New School. “All the academic research shows that if you buy and hold, you will do so much better than if you try to follow market trends, whether that be responding to an economic crisis or a recession.”
Historically, markets have roared back after major declines. Stocks rebounded following the Arab oil embargo in the 1970s, Black Monday in the ’80s, the dot-com bubble of the early aughts, and certainly the 2008 financial crisis, according to an analysis by MFS Investment Management of market recoveries dating back to the Great Depression.
Act fast, or postpone big purchases
If you’re in the market for a new car or home, what you can afford today may be well beyond reach in a matter of weeks. It may be wise to close that deal on a new car now. And make sure your interest rate is locked in, if you are working towards closing on a home.
Real estate website Zillow estimates mortgage rates could reach 8.4% in the event of a default, which would send a chill through a housing market already on ice thanks to the interest rate hikes of the last year.
“You’ll see a dramatic drop in buyers and when that happens, then you’re going to see property prices fall, a halt on different construction and home improvement projects,” says Artin Babayan, a home loan officer based in Los Angeles.
By some estimates, housing activity accounts for nearly a fifth of the U.S. economy. A stall in the real-estate market would reverberate, Babayan notes.
“I think it’ll really screw up the economy,” he adds.