Effects of credit score literacy and psychological traits on borrowing behavior: evidence from India using PLS-SEM

Zaid Altaf () and Farooq Shah ()
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Zaid Altaf: Central University of Kashmir
Farooq Shah: Central University of Kashmir

Future Business Journal, 2025, vol. 11, issue 1, 1-24

Abstract: Abstract Purpose This study attempts to measure the credit score literacy of borrowers in India and the effects of psychological traits and credit score literacy on borrowing behavior. The researchers develop a conceptual model for credit score literacy, psychological traits and borrowing behavior using robust theoretical support from existing literature. Thereafter, the study explores credit score literacy levels and their influence on borrowing behaviors—a relationship not explored previously. Theoretical framework The study explores the relationships under study through the “Theory of Financial Planning Behavior (TFPB)”, “Theory of Planned Behavior (TPB)”, “Life Cycle Hypotheses (LCH)”, and “Behavioral Life Cycle Hypothesis (BLCH)”. Design/methodology/approach The study uses K-means cluster analysis to test literacy levels, PLS-SEM for hypothesis testing, PLS-Predict and CVPAT for testing predictive power and predictive validity of the model. A questionnaire is administered to 425 borrowers using probabilistic random-digit-dialing across India. Findings The study finds Indian adults possess low credit score literacy levels. Further, psychological traits and credit score literacy significantly affect borrowing behaviors. Borrowing behavior differs with the level of credit score literacy, irrespective of the individual's psychological traits. The model has good out-of-sample predictive power and strong predictive validity. These findings contribute to existing theories (TFPB, TPB, LCH and BLCH) by validating them in the context of the current study. Originality The study develops a conceptual model for credit score literacy, psychological traits and borrowing behavior using robust theoretical support from existing literature. Thereafter, the study explores credit score literacy levels and their influence on borrowing behaviors—a relationship not explored previously. Finally, the study tests the predictive power and predictive validity of the conceptual model. Limitations The research is cross-sectional, does not isolate the effects of experience, makes assumptions about causality, has a limited sample size and an explanatory power of around 50%.

Keywords: Credit information sharing; Credit score literacy; Borrowing behavior; Credit scoring; Locus-of-control; Materialism; CVPAT (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1186/s43093-025-00601-y

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