At present, the financial market is facing severe constraints arising by household bankruptcy, mortgage debtor defaults and over-indebtedness. It is a common belief that improving economic (and financial in specific) literacy will improve the awareness of individuals about complex issues surrounding them and their ability to take financial decisions. The lack of basic knowledge about the functioning of markets may have detrimental consequences, in particular higher exposure to credit and financial risk. In spite of these wider developments, the importance of economic literacy on the making financial decisions about credits has been scarcely explored in empirical terms. This paper contributes to this line of research. Our purpose is to empirically demonstrate the influence of economic literacy on the financial decision making process, and, consequently, on the ability to meet the contracts. We analyse the Portuguese case, a country about which there is scant empirical evidence on these matters, and we use an original database built under the Economicando project. We assess how much knowledge individuals have with respect to economics lato sensu (i.e. including aspects of financial literacy). We seek to understand the relationship between economic literacy and over-indebtedness. The study has been conducted under the research project Research project "Economicando" (PTDC/EGE-ECO/100923/2008), financed by FEDER funds through the Programa Operacional Fatores de Competitividade - COMPETE and by national funds through the FCT Fundacao para a Ciencia e Tecnologia.
