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

This study uses a new nationally representative dataset (National Financial Capability Study, 2009) to examine the association between individuals' financial literacy and their high-cost borrowing decisions. The results indicate that financial literacy is indeed negatively associated with high-cost borrowing behaviors. Other factors such as lower levels of income, gender, educational attainment, and the recent downturn in economic fortune of a household were also associated with high-cost borrowing behaviors. This study's findings have important policy implications for improving individual financial decision-making of credit constrained consumers.