The Impact of Digital Financial Literacy on Consumer Over-Indebtedness: Evidence on Underlying Mechanisms

ABSTRACT

With the rapid advancement of digitalization, digital financial literacy (DFL) has become increasingly influential in shaping consumer financial behavior. Using data from the 2017 and 2019 China Household Finance Survey and building upon the foundational framework of Lyons and Kass-Hanna (2021), this study adapts and constructs a comprehensive evaluation framework to measure individuals’ digital financial literacy along four dimensions: risk awareness and attitudes, basic financial knowledge, digital financial skills, and digital financial experience. Based on this framework, we empirically examine the impact of digital financial literacy on consumers’ subjective and objective over-indebtedness. Results indicate a significant negative relationship between digital financial literacy and consumer over-indebtedness, suggesting that improvements in digital financial literacy effectively curb excessive credit use. Further mechanism analysis reveals that digital financial literacy mitigates over-indebtedness by promoting financial planning behavior and increasing participation in commercial insurance. Moreover, individuals with lower incomes and those residing in rural areas exhibit lower levels of digital financial literacy. Enhancing digital financial literacy among these groups is therefore of substantial practical importance for preventing and alleviating consumer over indebtedness.