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Let's say you have a credit card with a $5,000 spending limit. For some reason, the card company approves $6,000 in charges. You call them and ask, "Did you raise my spending limit?" They say, "No, but we will consider it." In the meantime, they demand payment in full immediately.
"But the charges are already approved!" you insist.
The card company threatens to close your account because you've spent over the credit limit. Your credit history could be ruined. You may even have to file bankruptcy.
Eventually, they relent and raise your credit limit. Financial disaster averted.
That's somewhat like what's happening with the government debt ceiling, the threat of government shutdowns, and the political showdown occurring every few months.
Read more: How a government shutdown would impact your money
In this article:
What is the U.S. debt ceiling?
Like many Americans, the federal government spends more money than it makes. The difference is that the U.S. Treasury can issue bonds it sells to investors to fund its operation. It's borrowing capital from anyone who wants to buy American debt.
Congress established the first federal debt limit of $45 billion in 1939. It was an attempt to cap government spending. How's that working?
The national debt now stands at over $36 trillion.
Why does the government have a debt ceiling?
During the budget and appropriations process, Congress decides how much money is needed to fund the military and national defense, social and health programs, Medicare and Social Security — and the interest payments on the nation's debt, which costs $169 billion.
Since the U.S. government uses debt to meet current obligations, the debt ceiling is not about approving new spending. It's about paying the bills currently owed. The debt ceiling is an attempt to put a limit on federal spending — after Congress has already approved it.
It's a horse-after-the-cart thing. So, what's the point of a debt ceiling?
"I don't think it's so bad because it does remind people there is a debt," Kathleen Day, lecturer on economic crises at Johns Hopkins Carey Business School, told Yahoo Finance in a phone interview. However, she said lawmakers should be exercising their objections and authority during the federal budget process, not with the debt ceiling.
"Many in Congress misuse appropriations and the debt ceiling to try to get done what they couldn't get done in the budget process," she added.
Learn more: What happens to Social Security payments during a government shutdown?
What happens when the debt ceiling is raised?
Raising the debt limit increases the amount of money the government can borrow to pay current financial commitments. It's like raising a credit card's spending limit to pay for already approved charges, like in our above example.
What if Congress doesn't raise the debt ceiling?
Day said the biggest risk of not raising the debt ceiling is damaging the country's credit. A default could trigger a financial disaster roiling the markets and the U.S. economy, causing a massive loss of jobs and the interruption of government benefits.
"It used to be no one would take seriously any idea that the U.S. wouldn't pay its obligations," Day said. "People no longer can say without a doubt, 'Oh, the U.S. would never let that happen.'"
Even a slight delay in government funding due to a debt-ceiling standoff would "make money more expensive," she said, by drastically raising interest rates.
Using 'extraordinary measures' to keep the government open
When the government bumps up against the debt limit, the Department of the Treasury uses what it calls "extraordinary measures" to pay its bills. It's a short-term shell game.
Simply stated, it includes tapping cash reserves, suspending some investments in government benefit funds, and delaying the sale of savings bonds.
Read more: Types of U.S. savings bonds and how they work
What if there was no debt ceiling?
Replacing the debt ceiling process with something less economically traumatic has been floated numerous times. The U.S. Government Accountability Office urged just such a change as recently as December 2024.
The GAO recommended that Congress immediately replace "... the debt limit process with one that requires decisions on debt to be made at the same time as decisions on spending and revenue."
The GAO added that the debt limit impasses also don't address the spending and revenue issues contributing to the nation's growing debt.
It also said that negotiating the debt limit at the last second makes a government default even more likely. This would "disrupt financial markets" and "inflict long-lasting damage to the U.S. and global economies."
The GAO has a powerful ally. President-elect Donald Trump believes the debt ceiling is meaningless and should be abolished.
“The Democrats have said they want to get rid of it. If they want to get rid of it, I would lead the charge,” Trump said.
Dig deeper: 2025 financial forecast — what to expect in mortgages, banking, investing, and credit cards
U.S. debt ceiling FAQs
What is the current debt ceiling?
The current debt ceiling was temporarily set at the amount the government owed on Jan. 1, 2025. Because Congress could not agree on a new debt ceiling, it used an interim funding tool called a continuing resolution to avoid a government shutdown. It's a budget patch Congress has used many times over the past nearly three decades. It essentially kicks the can down the road for another faceoff in March.
Who is the U.S. most in debt to?
Most federal debt is issued in Treasury securities held by investors in the U.S. Beyond that, the government itself holds Treasurys in the Federal Reserve System. Then, mutual funds, financial institutions, and state and local governments account for the next largest share of U.S. debt. Japan is the largest holder of American debt among foreign countries, followed by China, the UK, and nearly three dozen other countries.
Can the U.S. get out of debt?
The U.S. debt is greater than the nation's economy. Paying it off would be a monumental task. Instead, the more likely scenario would be the "responsible" management of the government's budget and debt, Kathleen Day said. "You don't want to say, 'Hey, let's all save up to build that factory.' No, borrow money, build a factory, put people to work, boost the economy, and pay back the loan, and you do it again."
This article was edited by Laura Grace Tarpley.
