Does Medical Debt Impact Your Credit Score? And How Much Do You Really Need To Save for a Home

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You're finally mentally ready to buy a house.

You know what kind of architecture you want.

You've driven through some neighborhoods you think you might like.

You've imagined what ownership will be like.

But you're still a ways away from being able to afford it.

So today we're going to talk about the best ways to save for a down payment.

Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds.

I'm Sean Piles.

And I'm Elizabeth Ayola.

Later this episode, we'll be learning about how to save for a down payment on a house.

But first up, our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money.

Our news colleague, Ana Helhoski, is with us to talk about a true boogeyman in the financial world, dum, dum, dum, medical debt.

Yeah, Elizabeth and Sean, this is everyone's worth's nightmare, right?

You either don't have insurance or don't have enough insurance or something happens and you end up owing for your medical care.

And sometimes that's really large sums.

And historically, that debt has gone on your credit reports and can do real damage to your credit scores.

Exactly.

Well, earlier this year, the Consumer Financial Protection Bureau, the CFPB, created a rule that was expected to remove medical debt that was under $500 from credit reports.

It also would have prohibited lenders from using medical information as part of their loan considerations.

But earlier this month, a federal judge told the CFPB that the rule exceeded its authority.

It's the latest hit to the agency, which the Trump administration has worked steadily to dismantle this year.

We have Rohit Chopra, former director of the CFPB, here to talk more about what the rule reversal means for Americans and what the state of the CFPB is today.

Rohit, welcome to Smart Money.

Thanks for having me.

Well, you spearheaded the rule banning medical debt from credit reports, which was issued in January, but has now been overturned.

So first off, I'm hoping you can talk about the agency's reasons for the ban in the first place.

One of the things that is really important to remember is that we do not want credit reports to be used as a vehicle to coerce people into paying bills they don't owe.

A credit report was really put together decades ago in order to help a lender determine whether someone has actually taken out a bunch of other loans or whether they actually have the ability to pay it back.

But we've seen all sorts of abuses in how debt can be parked on credit reports.

Sometimes that debt isn't owed at all, but debt collectors can use the threat of putting it on a credit report, harming your credit score in order to get you to pay and based on the cfpb's analysis we found that medical bills that were parked on credit reports even if they were valid were unfairly penalizing people on their credit score and the data really showed this

it was not

really predictive of your ability to pay an auto loan or a mortgage or a credit card.

And so rather than going through an extremely complex and cumbersome rule, we proposed implementing a long-standing congressional prohibition that protects people's medical information on credit reports.

And we proposed and finalized banning this practice.

So what could the medical debt ban have done for Americans?

Well, a few things.

I think we've all really been in that doom loop where let's say you go to the emergency room.

There may be a facility charge.

There may be a provider charge.

There may be an ambulance charge.

And often it may be subject to one deductible or one copay.

It's all complex and confusing.

But often people with insurance are saying, This is supposed to be covered.

And the provider or the facility and the insurance company go round and round and round.

And at a certain point, sometimes it gets plops on your credit report.

We don't want people to have to feel like they are one day going to be subject to their credit score being dinged, which jacks up the price.

for other types of loans.

It really affects interest rate or whether or not you're going to be approved or denied.

And the CFPB projected that it would actually help a substantial number of people over the course of the rule's implementation to qualify for more mortgages and to get more affordable rates.

Now, the big three credit reporting agencies, that's Equifax, Experian, and TransUnion, had challenged the rule.

So what was their position?

After we published a lot of our research, The big three credit reporting conglomerates actually voluntarily announced shortly after that they were going to remove most bills below $500.

And that was going to wipe out a major piece of it.

They didn't actually sue the CFPB themselves.

They hired a group, a kind of lobbying organization that represents also other parts of this medical credit reporting ecosystem and they sued.

The rule was very much grounded in exactly what the law allows.

The CFPB is permitted to analyze and restrict certain types of information, especially when it may be inaccurate.

But I think we have seen how the new CFPB, which honestly is not even doing any work other than vacating a lot of the key consumer protections and law enforcement actions that are taking place.

Now, I'm curious, were you surprised by the federal judge's ruling or is it something you kind of saw coming?

I didn't see it totally coming in the sense that it was a very legally sound one.

But once the dismantling of the CFPB started, this is not the only rule that they've gone to court to actually agree with lobbyists and other companies to just delete the rules on the book.

In fact, the new CFPB has actually just deleted

all sorts of guidance documents, policies, and and others.

I think with the fundamental goal, as Elon Musk stated, to delete the CFPB.

Now, to just provide listeners with a little bit of context, in the time since President Trump removed you from your position, his administration has taken a series of actions to destabilize the agency, including trying to fire nearly the entire staff, halting operations, dropping lawsuits against financial services companies, and the big beautiful bill called for deep further funding cuts.

So, from your perspective, what's the status of the CFPB's operations today?

And what are the consequences for consumer protections?

Yeah, right now the CFPB is in a coma.

It is

not really doing anything.

And if it is, it's doing things to really help those who have broken the law or already have a lot of power.

And here's what I think is the big implications.

for consumers more broadly.

Number one,

it is going to be harder to really make sure that the price you're seeing or the interest rate you're seeing is accurate and being placed on that bill properly.

We took action against a lot of companies who were reporting false information on credit reports about auto loans, including saying that maybe you weren't paying.

Maybe your car was even repossessed, but you were in a payment plan.

That law enforcement work deters a lot of that bad stuff.

Or take something you wouldn't even notice, maybe a credit card company.

Maybe you go in on a trip and you charge something in a different currency.

What if they were manipulating the exchange rate over hundreds of thousands of customers?

I think that those are the little things that will just make it more costly for consumers.

But then there's the bigger picture question.

One of the reasons the CFPB was set up was in response to a massive mortgage crisis.

And there were serious abuses on subprime mortgages, and it led to a meltdown of the global economy.

The CFPB's work really does help make sure that those consumer abuses don't turn into a macroeconomic calamity.

Now, one of the roles of the CFPB is to collect complaints from consumers.

Nearly 9 million have been processed since the CFPB was launched in 2011, and some $21 billion were returned to consumers found to be wrong by financial institutions.

Now, the CFPB's website shows that it is still accepting complaints.

So far this year, more than 2.8 million complaints have been received.

My question is, how can an agency that now still has so few resources able to handle the volume that it once did?

And what can consumers expect to happen to those complaints that they submit?

I actually think the CFPB complaint system is one of the best systems in all of government.

And here's why.

You know, often when you file a complaint with a government agency, it goes into some inbox or maybe even like a digital black hole.

Consumers won't know if it's even being read.

Our system was different.

That complaint was sent directly to the financial company and they were ordered to respond.

So without the agency even really picking up a pen, every day people were getting errors corrected on their credit reports.

They were getting refunds on fake or false fees.

They were even sometimes able to avoid foreclosure or auto repossession.

I hope people don't just stop filing them and giving up because we still need them to raise their hand.

State attorneys general, state bank regulators also have access to this data.

And there's even a public database that helps people see what is going on.

And that is a critical, critical component and really was the central node of everything we did.

I want to ask one last question about the court ruling.

Where does it leave Americans who have or might accrue medical debt in the future?

They've got to be on guard.

I think this is, there's no good answer to this.

Everyone should be checking their credit report.

regularly.

You are entitled to one free credit report per credit reporting conglomerate and go to annualcreditreport.com.

You should look at the resources about what to do when facing medical debt that you may not owe or that should have been covered by insurance.

You should also, if you're struggling to get an insurance claim resolved, go to your state insurance commissioner's website.

They will have ways in which you can try to really get that claim resolved so that it doesn't fall on you financially.

So I really offer a lot of empathy for everyone having to deal with it because people should be able to focus on getting better, not focus on all this paperwork.

All right, Roja Chopra, thank you for joining us today.

Appreciate it.

Thanks so much, Ana.

And thank you, Ana.

Up next, we answer a listener's question about how to save for a down payment for a house.

But before we get into that, a reminder to send us your money questions.

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Leave us a voicemail or text us on the nerd hotline at 901-730-6373.

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In a moment, this episode's money question.

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We're back and answering your money questions to help you make smarter financial decisions.

This episode's question comes from a listener's email.

Here it is: Hi, nerds.

My husband and I finally moved to our dream area and are renting.

We just finished paying all student loans, car loan, and credit card debt, so we are now focusing on aggressively saving toward a down payment on our first house.

We do have about $500 at a time in savings for any emergencies, but are ultimately dragging anything we can into our high-yield savings for this down payment, as CD rates seem close to the same rates and we want to be liquid when the time comes to pounce on a place we will likely be saving for another eight months at least until the time is right not sure if we are doing the right thing or if we should be considering other savings accounts or items to consider before this next step thanks

now to help us answer this listener's question on this episode of the podcast we are joined by kate wood an authority on housing and not a stranger to the podcast hey kate hey thanks for having me so it sounds like the listener is in a great spot all around They've paid down debt, are living in their dream neighborhood, and now they want to save aggressively for a house.

The bulk of their question is around the right savings vehicle for a down payment.

But before we get into that, the listener said they have around $500 socked away for emergencies.

Good job, listener.

It's usually recommended people have three to six months of expenses saved, depending on whether it's a one or two income household.

Okay, another before we get into that.

Can we just dig into this a little bit more?

What should your financial priorities be before you're saving for a down payment and buying a house?

Well, in an ideal world, you'd have that three to six month emergency fund saved before you make a down payment on a house.

And it'd be great if folks could save their down payment while they're building up their emergency fund.

Our listeners said that they have around $500 in an emergency fund.

And the truth is that $500 will get you out of most binds if something does come up.

That's generally the amount that we've seen help people avoid going into credit card debt.

But it still makes me a little bit nervous because I'm willing to bet that $500 is not enough to cover even one month's worth of necessary expenses, let alone three or six.

So if I were this listener, I would be working on beefing up that emergency savings as I'm increasing my down payment fund with the realization that it means it might take longer to get to where I need to be with that down payment fund.

I'm with you, Sean.

And I know when I'm saving towards a goal, sometimes that latter part that you said can make me maybe not save as much in the emergency fund because I just want to get there quickly.

But I do imagine that if the listener doesn't have a robust enough emergency fund, what could happen is they end up tapping into the savings for the deposit when an emergency comes up.

And it's kind of counterproductive, right?

That definitely could happen.

What about their whole financial picture?

So, what about debt?

They mentioned that they've paid off debts, but how important is it to work on paying off your credit cards or student loans before you're putting a down payment on a house?

Our listener is in a pretty great spot, as I mentioned when I read their question.

They've paid off a bunch of their debt, but you don't have to be totally debt-free when you're getting ready to buy a house and putting a down payment out there.

So in an ideal world, we'd all have enough money to build up our emergency savings and our down payment funds and have no credit card debt.

But for many folks, that's just not the reality.

You can certainly buy a house with credit card debt.

That's quite common, actually.

But you may want to talk with your lender or broker to see how much debt they would find acceptable.

And of course, if you have a lot of debt, that can lower your credit score, which might mean that you get less favorable terms on your loan.

So all good things to consider.

But again, the good news for our listener, at least, is that they've paid off their debt.

So great job.

Let's get into the meat of the question now.

Since it's a short-term goal for the listener, they said they want to do it hopefully within the next eight months.

They want their cash to be liquid and easily accessible.

You're a homeowner, Kate.

So tell us, where did you save your down payment?

Well, this is really embarrassing, but let's remember that I didn't always work at NerdWallet.

I'm a nerd now.

I wasn't always a nerd.

And so I pretty much saved it in my checking account.

Before I was a nerd, I had a very fuzzy idea of what a high yield savings account was.

I probably thought it had to do with investing.

And CDs, just like, that's an outdated music format.

So

speak for yourself, Kate.

I still love my CD player in my car.

I listen to CDs all the time, not outdated to me.

Well, regardless, certificate of deposit was very foreign to me.

And so, yeah, I mean, I think in my mind, I thought I was doing it right because I was saving the money and I was like, this is amazing.

I'm doing it incredibly.

But I really wasn't doing myself any favors with that strategy.

Yeah.

I mean, hey, at least it wasn't just stuffed under your mattress or in a shoebox or something.

So you were able to save.

And that's kind of what matters at the end of the day, even though you didn't get a great yield on it.

So no, I got it.

I got no yield.

I got no yield on it.

So that was really not so much a step up from under the mattress as a step.

sideways from under the mattress.

But

Sean, I feel like you probably did this in a better way.

Like, how did you save up your down payment?

Well, I had the fortune of being a nerd by the time I was saving for a down payment on my house.

So I kept my money for my down payment and my closing costs in a high-yield savings account.

And naturally, I had an account designated for this purpose so that I wouldn't touch it and could focus on building up this very specific nest egg without being tempted to tap into it when some other expense popped up.

I wouldn't expect anything less from you, Sean.

Of course.

I personally am not a homeowner, but I do know something about high-yield savings accounts or HYSAs.

They definitely check the boxes of being liquid and easily accessible, which the listener wants.

But high yield savings accounts can be a smart place to save for a down payment, as Sean did, because they offer interest and more than you'd get with a checking account or traditional savings account, which our dear nerd Kate saved in.

No shade at all, Kate.

Although interest rates have gradually dropped in recent years, some accounts are still offering as high as 4.66% as of today.

And high-yield savings account rates will tend to be higher than the national average for traditional savings accounts, which is currently around 0.38%.

Now, if you would like to see the most current list of high-yield savings accounts with the best rates, check the link in today's episode description, or you can just search online for NerdWallet best high-yield savings accounts in whatever search engine you use.

Yeah, Elizabeth, as you laid out, high-yield savings accounts are a really great place to park your cash.

They're generally FDIC insured.

And even though they are liquid and barely accessible, the cash in these accounts is often a little bit less available than the money you'd have in your checking account.

And I think that can create some nice and useful friction to help you avoid spending that money that you have allocated to this purpose.

It would have been really helpful in retrospect to know all this because I had thousands in my normal checking account earning zero interest, right?

And this is such a thing for us.

High yield savings account, you could be getting passive income.

And instead, I was like working for every dollar of that down payment.

It was very active income.

So, Sean, would you like to chime in about whether CDs are a good place to park a down payment, which the listener wanted to know?

Is it a better option than a high yield savings account?

Yeah, I do like that our listeners considering certificates of deposits because they're right that the yields can be pretty similar to high yield savings accounts.

But whether it's better for you can depend on your timeline, the potential yield that you might get, and a need for flexibility.

So with CDs, your money is generally tied up for a set term and you can't take it out before that term is up without risking the yield that you get on that account.

CD terms vary, but the most commonly available options range from three months to five years.

For this listener, the best option might be maybe a three to six month CD since they want to purchase their home within the next eight months or so.

As of the date of this recording, NerdWallet found that six month CDs are offering as high as 4.45% APY.

Meanwhile, the yield on my savings account is earning me about 3.8% APY right now.

So the CD is a little bit better, but again, you have that restriction of accessibility and timeline.

If you're going to go the CD route, you'll want to make sure that you're timing things just right.

Because if you end up closing in the house earlier than expected, you might have to forfeit some of the yield on that CD if you do pull the money from the account before its maturity, which it seems like our listener is already aware of and a little concerned about.

From what I'm gathering, Sean, it sounds like you're saying maybe CDs are a better option for people with more time to save.

Yeah, listeners who may have longer time horizons could explore longer-term CDs as an option for saving money.

Folks could also consider a CD ladder, which is when you invest in multiple CDs with different maturity dates if you have enough time on your hands.

So, what is the verdict then, Sean?

High-yield savings account or CD for the listener?

The answer is a classic it depends.

Whoever gives them the highest return, given their time constraints, is probably your best bet, but they're both safe options.

Using a CD calculator and a compound interest calculator can help you compare potential returns of each option.

And if you're likely to end up dipping in your pot of money, maybe a high-yield savings account is better since you, again, might be penalized if you take your money out of the CD before it matures.

Now that we are done nerding out on CDs and high-yield savings accounts, let's get back to the housing stuff.

Kate, we're going to need your expertise here.

I am so excited to finally flex it.

All right.

Well, sometimes people can be so focused on saving for a down payment that they forget other expenses that come with a home.

What are some other things people should be saving for outside of a down payment, Kate?

I'm thinking about closing costs, for instance.

Closing costs are a big one for sure.

Basically, you want to think about your upfront costs of buying a home and then also your ongoing costs of owning the home.

So for upfront, down payment, which we're obviously about to talk about a bunch, closing costs, of course, can't forget moving, right?

Diving into the down payments, since that's a big part of their question, down payment is going to vary depending on the type of home loan you're using because different kinds of mortgages require different minimums and it's always expressed as a percentage of the house's purchase price.

We know the housing market is a bit, shall we say dysfunctional at the moment.

Houses are super expensive.

Interest rates remain pretty high.

I saw a stat from Harvard's recent report on the state of the housing market that said that housing prices have gone up 60% nationwide from 2019 to 2025.

That's 60% is just bananas.

And putting together a down payment for an expensive house can be a real challenge, but folks don't typically have to put down 20% anymore, right?

Absolutely right.

You do not have to put down 20%.

So with a a conventional loan, which is by far the most common type of purchase loan in the U.S., you can put down as little as 3%.

And again, 20% is something that you might only see with a jumbo loan.

In 2024, first-time homebuyers put down a median down payment of 9%, according to the National Association of Realtors.

If you're wondering, why do we all think we need a 20% down payment?

It just goes back to one characteristic of conventional loans, which again, by far the most common mortgage in the U.S.

So, if your down payment is less than 20%, you have to pay for private mortgage insurance until you reach that 20% level of equity in the home.

And this was yet another mistake that, like, naive pre-nerd wallet Kate made.

I was convinced that I needed to avoid PMI private mortgage insurance at all costs and put down 20%.

And realistically, if I had just made a smaller down payment, I could have afforded a nicer home that would have probably cost me a lot less to repair and maintain.

Yeah, you bought a super old house, right?

It was the 1700s or something.

Yes.

I'm amazed that house wasn't haunted.

I asked you

everyone asked it's bought.

Well, when I bought my house, I put down 3%, which was really the only way I could afford to buy a home.

I did have PMI and I did resent it, but I was able to get rid of it once my home accrued in value and I had my loan for two years.

And it wasn't that difficult to do, even though my lender did make me jump through a couple hoops to do it.

I was adamant and got it taken care of.

It's not a big deal.

Absolutely.

And, you know, that is the plus side, right, of those home prices going up.

Like Sean mentioned, horrific if you're a home buyer, but if you're a homeowner, your equity is increasing without you having to do a single thing.

So that's kind of amazing.

Overall, PMI, just like not the boogeyman people.

And by people, again, I also mean me six years ago.

So that's down payment, but let's hop back over to the other really big one that Elizabeth mentioned, closing costs.

So closing costs are all the money that you pay to close the deal on the home.

And that includes a bunch of different stuff.

The total is usually between 2% and 6% of the amount of your loan.

So just to clear that up, that's not the purchase price.

Your down payment is a percentage of the purchase price.

Closing costs are going to be a percentage of the loan amount, which is your purchase price minus your down payment amount.

And that includes a lot of stuff.

All the fees that you pay to the lender, services that you need to pay for, like your title search and appraisal.

You often have to make prepayments toward things like homeowners insurance, property taxes.

If you're in a state that requires an attorney, real estate attorney fees, it kind of goes on and on.

And also, if you're using a government-backed loan like an FHA loan or a VA loan, those have their own upfront costs that are included in closing costs as well.

Kate, all I heard when you explain that is dollar signs to ching, to ching, to ching.

So is there a way that people can calculate in advance what those closing costs are going to be, especially if they potentially need to save for it ahead of time.

Absolutely.

So, when you are pre-approved for a mortgage, so this is before we're actually applying for the loan, we're feeling things out here.

When you're pre-approved, the lender will give you a document called a loan estimate.

That is going to detail all of the closing costs and it'll clearly separate which are sort of set in stone and which are ones that you could negotiate or potentially shop for.

This is a uniform form that all lenders have to use, so it's going to be identical everywhere.

One closing closing cost that I didn't mention, and that actually isn't included in the loan estimate because it's essentially separate is the real estate agent commission.

So traditionally, certainly when I bought my home, certainly when Sean bought his home, sellers would pay both the buyer's agent's fee and their own agents.

So there was a big settlement with the National Association of Realtors last year.

The upshot of that is that in theory, that's no longer the case, that sellers sort of must pay it.

But what we're seeing now in practice is that sellers are generally still footing the bill for both agents.

Well, I want to talk about home maintenance.

Houses can easily become money pits, especially when they are several hundred years old, as you know well.

And when you are in a primary residence that hasn't had a lot of repairs made to it and you haven't budgeted for this, it can be a big drain on your savings.

So what are your thoughts around how much people should be putting aside for home maintenance amid all these other expenses that we've been talking about?

It is really, really vital to set things aside for home maintenance, particularly too, because like at the more affordable end of the housing market, you are likely to see properties where there's been a lot of deferred maintenance, particularly people aging in place.

They might not be as able to take care of the home to do the basic upkeep.

So you want to make sure that you have money for that.

That said, honestly, even if you are buying a brand new home, you're buying it from the builder, you really want to make sure that you've got cash on hand for any unexpected repairs, things that you want to change right away.

Because really, when you've just bought a home, you are in nesting mode, right?

Like you might have never been in a Home Depot in your life and suddenly it's your home away from home and you're like humming their little jingle and all that stuff, right?

And you're going to need money for paint and garden tools and like all the stuff that you're seeing there.

So generally, it's recommended that you try to set up an emergency fund that is just for your home.

Ideally, you're trying to save up 1% of your home's current market value.

per year.

All right.

Kate, can you give us an example of how much people should be looking to save if they want to buy a house?

Because, like you said, they're going to need more than a down payment.

Apologies in advance.

This is going to be a lot of numbers, but let's just get into it, okay?

So we've got at least 3% of the purchase price for your down payment, 2% to 6% of your loan amount for closing costs.

And then again, on top of that, you are going to need cash on hand for stuff like moving new furniture repairs.

So if we look at the median price of existing homes in the U.S.

in May, that's the most recent month that we have data for, that median price, according to the NAR, was just over $420,000.

So if we're looking to save up 3% of that price, our down payment would be $12,600.

Again, there are plenty of reasons you might want to go over 3%, but we do not need 20, and I can't emphasize that enough.

So on top of that minimum of almost 13 grand, we're also going to need 2% to 6% of the loan amount for closing costs.

So if we're making a 3% down payment on this $420,000 home, our loan is going to be $407,400.

And I need to start rounding because these numbers are getting too elaborate.

Okay.

Yeah.

But with that loan amount, we're looking at closing costs that are in the neighborhood of $8,000 to $25,000.

Wow.

That's a huge range.

It's a big range, right?

And so then if we put that together, so that was just our closing costs and our down payment, we're looking at between $21,000 and $37,000.

Wow.

And this is why buying a house is so difficult.

I know, right?

It is.

And if we want to go ahead and add that emergency fund to it, right?

So 1% of, we'll assume the value is $420,000, right?

Like we just bought the house.

So that's another.

$4,200 that we're trying to save.

So now you're looking at saving a minimum of more than $25,000 in this economy, Kate.

I know, I know, I know, I know, I know.

But this is why we say slow and steady, and that's why it's important to also focus on the emergency fund while you're saving for this down payment, even though that might be kind of counterintuitive.

You need to cover all of your bases at the same time so you're not putting all of your money in one savings basket.

And also to remember that buying a home is an incredible achievement, but you don't want to be in a situation where your home is a money pit.

And that's actually what put me off of buying a house during the pandemic.

Because I'm like, yeah, sure, I'll have a house, but I'll also be cash poor because all my money will go towards the house.

So

absolutely.

Yeah.

You don't want to wind up in a situation where you're house poor.

One thing I wanted to say, what I just went through, if it sounds like a lot of money, like that's because it is a lot of money.

That was a lot of money that we just talked through.

And so that's why something that I always recommend to people, especially if you're a first-time homebuyer, look into down payment assistance programs.

These exist everywhere in the United States and they're generally fairly underutilized.

So every state offers these through their state housing authorities, but you could find them potentially at the city or county level.

And the kind of assistance they offer is going to vary.

Sometimes it's a really low interest alone or a deferred interest loan, but other times it's grants.

So that's literally free money to help you buy that house.

It's also really important to know that these aren't always income-based.

Sometimes it's just about the location.

And also, if you aren't exactly a first-time buyer, these programs usually define first-time buyers as someone who hasn't had an ownership interest in a property in at least three years.

So even if this isn't your first rodeo, like in a technical sense, you might still qualify.

What a wonderful silver lining, Kate.

Thank you to balance out that high cost.

So

anything I can do.

Well, Kate, thank you for coming on and sharing your insights with us, as always.

Of course, thank you for having me back.

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