With the rapid evolution of the rural digital economy, analyzing the impact of digital literacy level on farm households’ formal borrowing is crucial for easing credit constraints and fostering rural economic growth. Leveraging the data from the 2020 China Family Panel Studies (CFPSs) and applying binary probit models and the Karlson–Holm–Breen (KHB) method, this study delineates the positive correlation between the digital literacy level and increased formal borrowing among farm households. The findings, which were robust against endogeneity and robustness tests, underscore the role of digital literacy level in augmenting farmers’ earnings and social networks, with a notably stronger mediation by earnings. The effects are particularly significant for middle-aged and older, less educated males in the central and western regions, in contrast with younger, highly educated females in the east. This research advocates for enhancing rural digital infrastructure and education, alongside financial system reforms, to advance rural financial development and support sustainable rural revitalization.