Personal debt may remain a problem for many UK consumers, despite a new economic indicator casting doubt on the notion that Britain is heading back into recession.

The latest Markit/Chartered Institute for Personnel and Supply Purchasing Manager's Index (PMI) has given a reading of 52.1 for January, which does not just represent growth, but the fastest increase in output in ten months.

And the situation may be helped by falling costs and prices, with inflation easing.

The indicator rose from a reading of 49.7 in December, which means it has gone from contraction to expansion and is a possible indicator that the UK economy is doing better than thought and that gross domestic product (GDP) could be increasing again after shrinking by 0.2 per cent in the fourth quarter of 2011.

Such a view was expressed by Royal London Asset Management's senior economist Ian Kernohan.

He said: "PMIs tend to be a more reliable guide to economic activity than early estimates of GDP, which are often revised.  Today's PMI Manufacturing release shows some recovery in manufacturing output and is not consistent with the UK economy being in a double-dip recession. "

While this could help preserve thousands of jobs that would be lost if Britain slipped back into recession, many people will still be in debt and although still being in work will help, some might still need debt management plans to tackle their situation. 

Signs that people are handling their finances better may have been indicated by this week's Trends in Lending report by the Bank of England, which revealed that cases of personal insolvency have fallen.

By Joe White

Britons may be getting slightly more to grips with their debts, new data from the Bank of England has indicated.

The latest Trends in Lending report – covering the third quarter of 2011 – suggested the wave of insolvency and consequent debt write-off may be on the wane.

It noted that the level of debt write-off was down slightly during the three-month period, while the tally of personal insolvencies in England and Wales "fell slightly".

"Some major UK lenders reported that these indicators had been slightly lower than initially anticipated," the report added, noting that many lenders expect this situation to remain "stable" in the next few months.

Those who do have major debt problems – such as arrears of over £15,000 that they cannot afford to pay back- may wish to seek an individual voluntary arrangement as a means of getting on top of their debts.

It would ensure monthly payments are lower and, provided these are maintained, everything left would be written off after five years.

One reason there may be fewer insolvencies is that consumers are piling up less credit card debt.

The Bank's report stated: "The annual rate of growth of consumer credit remained low
compared with the period prior to the financial crisis," describing credit card lending as "weak".

People seeking to get on top of their debts may find it is wise to concentrate first and foremost on the most expensive.

This was the tip recently given by director at Ark Financial Planning Phil Perry, who also advised consumers to cut down on non-essential spending to help free up cash to reduce debt.

By James Francis
 

Debt consolidation efforts should prioritise paying off the most expensive bill first, an expert has stated.

Many consumers have multiple debts and director at Ark Financial Planning Phil Perry said sorting them out means acting methodically.

"Obtain your credit statements and assess that to see where you stand and what you have got coming in, what you have got going out and look for the most expensive things first and try and get rid of those things," he stated.

Mr Perry noted that in some cases, debt consolidation can be helped by transferring credit card debts to new accounts with low or zero interest introductory offers, while paying off loans is important because "interest rates are so high".

He advised that consumers should look to cut back on non-essential spending to help do this if necessary and also suggested those who are having difficulties contact their banks or building societies to see if they can arrange to reduce the monthly payments.

People whose debt is so large they cannot get on top of it even using the methods mentioned by Mr Perry may wish to consider an Individual Voluntary Arrangement.

This applies to those who have debts of £15,000 or more and works through an agreement with creditors to take a lower level of repayments over a period of up to five years, after which any remaining debt is written off.

Borrowing on loans and credit cards from Finance and Leasing Association members increased by two per cent in the three months to October 2011 compared with the corresponding period in 2010, figures from the organisation revealed last month.

Posted by Paul Thacker