Financial literacy is the ability to use financial knowledge and skills to effectively manage personal finances. Financial literacy is needed to achieve the required financial security and targeted quality of life of an individual. A financially literate individual should exhibit better financial behavior; make rational financial decisions, find it easier to navigate the financial market, better identify potential opportunities and more successfully solve financial problems and eliminate the consequences of bad financial decisions. Likewise, an individual who is well informed about mortgage interest rates and the conditions currently offered in the financial market is less likely to fall victim to financial fraud or borrowing on extremely unfavorable terms. Accordingly, it has been shown that people with a higher level of financial literacy are less indebted compared to people with a lower level of financial literacy. The aim of this thesis is to present an analysis of the importance of financial literacy in responsible planning and management of personal finances and to show the relationship between financial literacy and indebtedness of the individual. The paper analyzes the state and trend of household indebtedness and the impact of financial literacy on citizens' indebtedness. Over-indebtedness is a very common and widespread problem in the world, and the Republic of Croatia is no exception. Therefore, the question justifiably arises, whether increasing financial literacy can reduce the over-indebtedness of citizens and ensure greater financial stability of the household sector.