Borrowing Decisions of Credit Constrained Consumers and the Role of Financial Literacy

This study uses the 2009 Financial Capability Study dataset to examine the association between individuals' financial literacy and their costly borrowing decisions. The results indicate that financial literacy is indeed negatively associated with costly borrowing behaviors. Other factors such as lower levels of income, lower levels of educational attainment, and recent downturn in the economic fortunes of a household were associated with high cost borrowing behavior. Interestingly, women were less likely to engage in high cost borrowing than men. This study's findings have important policy implications for improving financial decision-making of credit constrained consumers