Since the introduction of a series of collective forest tenure reforms in China, diverse forestland mortgage financial products have been available even in rural areas. It is difficult for rural households to make appropriate financial decisions in order to increase their income due to a lack of financial knowledge and relevant skills. It is important to analyze the relationship between financial literacy, borrowing behavior, and rural household income. Based on the learning-by-doing theory, the credit constraint theory, and the data obtained from the survey of 460 households in five rural countries of Liaoning Province, alternative econometric models were used to estimate the “Financial Literacy-Borrowing Behavior-Household Income” transmission channel. The findings reveal that the financial literacy levels are positively associated with household income and that there is an inverted U relationship between them which is low on both sides and high in the middle. In addition, the financial literacy has a significantly positive effect on the farmers’ credit behavior, which in turn promotes their income growth. The results provide a new perspective on the study and a clear explanation of the role of financial literacy in improving the loan amountsavailable in China’s rural areas. The paper concludes with recommendations for policymakers to prioritize financial education that will promote and support credit constraint reduction in collective forest areas.