Does financial knowledge affect borrower discouragement among various social categories? Evidence from the United States

Abstract A deficiency in financial knowledge often precipitates costly financial choices, affecting consumers' behavior and decision‐making. We delve into how financial acumen influences borrower discouragement by utilizing data from the U.S. Federal Reserve's Survey of Household Economics and Decision‐Making (2017–2022). Discouraged borrower describes creditworthy individuals who, despite a genuine need for credit, avoid applying due to anticipated rejection. Our research reveals that financial knowledge diminishes the likelihood of borrower discouragement after controlling for various societal groups. However, when we estimate the model separately, its impact is not uniform across these societal segments. Specifically, our study uncovers that the effects of financial knowledge are different on gender, race, and occupational status. Further analyses of various subgroups confirm that race and occupational status are consistent predictors of borrower discouragement, even when accounting for financial knowledge. These insights underscore the importance of providing targeted financial education to address these disparities.