Abstract: Reducing the credit constraints of farmers is a key to promoting the development of China’s rural economy and to increasing farmers’ income. Based on the data collected in China Household Financial Survey of rural households in 2013 and the farmers’ credit needs, this paper empirically analyzed the relationship between farmers’ formal credit acquisition and farmers’ financial literacy and explored the internal mechanism of farmers’ formal credit constraints from the demand side by the Probit model and the Ivprobit model. Results show that 53.1% of farmers are more constrained by credit from the demand side, and the conversion rates from potential formal credit demands to effective formal credit demands in agricultural production, industrial and commercial operation, real estate purchase and automobile purchase are 47.3%, 56.0%, 36.1% and 52.6%, respectively. While the conversion rates from effective formal credit demands to realized formal credit acquisition are 70.0%, 78.6%, 74.2% and 90.0%, respectively. The improvement of farmers’ financial literacy level can significantly increase the chance of obtaining formal credit and reduce the probability that farmers with potential formal credit demand do not know how to apply for loans or have cognitive bias for loans. At the same time, the promotion of financial literacy can encourage farmers to convert potential formal credit demands into effective ones, and then reduce the formal credit constraints imposed on farmers. Therefore, this paper suggests: to improve financial literacy of farmers, to utilize farmers’ social capital to reduce the mitigation effect of information asymmetry, and to improve and implement the land transfer policy effectively.