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Abstract: Based on China Household Financial Survey data in 2013, this paper examines the urbanrural differential effect of financial literacy on household borrowing in China, and also verifies that the expanding of wealth inequality will restrain the effect of financial literacy on household borrowing by choosing Instrumental Variable. Our research results show as follows. First, financial literacy is a major factor affecting household borrowing. The improvement of householders financial literacy dramatically increases not only the probability of household borrowing but also the scale of debt. Second, the effects of financial literacy on household borrowing of urban areas is significantly different from rural areas, and this effect is greater on rural households while face more severe credit constraints. Third, wealth inequality has significantly inhibitory effect on household borrowing. The expansion of wealth inequality will reduce the households credit demand, and reduce the probability of household borrowing and debt scales. Fourth, with the expanding of household wealth inequality, it reduces the positive impact of financial literacy on household borrowing. According to the conclusions that mentioned above, the government should vigorously develop consumer financial literacy education, and pay attention to the rationality of family income distribution, which promote the healthy development of consumer financial market in China.

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