Cellphone Plans: To go prepaid or postpaid?

Cell Phone

Photo: JonJon2k8

Cell phone carriers could learn a thing or two from Hick’s Law. Named after British psychologist William Edmund Hick, it posits that the more choices you’re given, the longer it will take you to choose. Verizon Wireless, meet Dr. Hicks.

The options offered to you when buying a cell phone and choosing a plan can make Toyota’s option packages look like child’s play. Android or iOS? Smartphone or basic phone? Big screen, really big screen, or obnoxiously big screen (have you seen the Samsung Galaxy S III)?

But one of the most important choices you’ll make when it comes to cell phone service is prepaid service or a contract plan? Consider these pros and cons before you sign up for that pricey two-year contract:

Prepaid Plans

Advantages

The biggest advantage of a prepaid phone plan, for the budget-conscious, is that you can use it to save money. The best way to know if a prepaid plan will save you money is to check out your current cell phone usage. If you’re using way less than your allotted minutes/texts per month, you could probably save on a prepaid plan.

If you’re a young adult or recovering from poor credit, a prepaid phone can be a good option, as well. Contract plans generally require at least decent credit because the phone company is basically loaning you service, which you’ll pay for at the end of the month. Since the prepaid phone company has your money before they provide your service, they don’t care much about your credit score.

Another advantage of a prepaid plan is that you won’t be locked into a long-term contract. If you’ve ever needed to switch from Verizon or another major service carrier for whatever reason, you know what a pain contracts can be. You have to pay a fortune to get out of them. With a prepaid plan, you’re always free to switch to a better or cheaper option because you don’t sign a contract.

While prepaid phones may have some limits as to functionality, they’re getting better. In fact, many prepaid services now offer 4G wireless connectivity alongside traditional calling and texting services.

Disadvantages

Prepaid phone plans aren’t cheap for everyone. Some plans charge per-minute for both incoming and outgoing calls. While most of us could try to cut back on calls in order to save money, this doesn’t always work – especially your cell phone is your only phone.

Also, many prepaid phone providers attach an expiration date to their minutes. So you might buy a card for 300 minutes, but it will have to be used within 60 days. If you don’t use the minutes, you just wasted money.

If you’re switching to a prepaid plan from a traditional provider, you may have to buy a new phone. While some providers are offering the latest models, including smartphones like Apple’s iPhone 5 and Samsung’s Galaxy S III, some still stick with flip phones. (Note: With some plans, your current phone may be compatible if you switch the SIM card.)

Plus, because you aren’t signing a long-term contract, you’ll have to pay for the phone up front. If you’re used to getting $300 iPhones with your Verizon upgrades, the sticker shock can be something.

While many prepaid phone users say they get great clarity and coverage for their calls, this isn’t always true. For instance, WalMart’s new Straight Talk prepaid program runs off some of T-Mobile’s older towers, not the entire network. This means limited call coverage in nonurban areas.

Also, with most contract plans, you basically get built-in roaming. Remember back in the early 2000s when you had to be careful to use your phone less when you were away from home? With major networks, that’s usually no longer an issue. You’re technically roaming, but you’re not getting charged more for it.

Smaller networks and prepaid plans, on the other hand (even prepaid plans that run through a major network) may still have roaming charges. So make sure you know exactly what network your phone will run off of and if you’ll be charged for roaming out of network.

Also, with a prepaid phone, you may need to keep track of your balance of minutes. Most providers make this easy, and you can track minutes on your phone or online. Still, you don’t want to run out of minutes in an emergency, so you’ll need to stay on top of them.

Finally, for most prepaid plans, your only phone warranty will come through the manufacturer. You may still be able to get a warranty if your phone is damaged, but you might be out of luck if it’s lost or stolen. Plus, if your phone is stolen, whoever takes it can use the minutes you’ve prepaid for. With a postpaid plan, on the other hand, your phone carrier can shut down your phone so that no one else can use it.

Contract Plans

Advantages

Most major, well-known cell phone services run on contract plans. If you sign up for a new plan with Verizon, for instance, you’ll be billed on a set schedule for a set fee. (Unless, of course, you go over your allotted minutes, texts or data.)

These plans can be helpful because they let you know exactly what you’ll expect to spend each month, and their per-minute rate is usually lower – especially on unlimited plans. You won’t have to worry about running out of minutes, either.

Another advantage of a contract is that, with most large carriers, the coverage is quite good – and getting better every day. Providers like Verizon Wireless and Sprint Mobile seek to keep their customers by ensuring that calls always come in. So they’re putting up new towers and expanding their services, which includes offering the latest data services, as well.

If you sign up for a new plan with one of these companies, you’ll usually get a discount – often a significant one – on your new phone. And these companies carry the absolute latest models.

Plus, if your phone is lost or stolen, you can call the service provider to put a hold on the phone, so others can’t use your minutes, texting or data.

Disadvantages

Unless you make full use of your plan (and most of us don’t), with a contract you’ll probably pay more than you ought to for your services. This is especially true if you’re just using the basics, a minimal amount of minutes and texts each month. This is why so many on a tight budget switch to prepaid services.

Also, a contract plan normally requires a credit check. This can take a bit, so you may have to wait before you get phone service. If you don’t have a good credit score – especially if you’re known for making late payments – you may have to get someone to cosign on your cell phone plan.

Finally, one of the biggest disadvantages of a contract is, well, you have to sign a contract. With most services, you need to sign a two-year contract. While this locks in your prices for that time period (and might grandfather you into lower prices after that time period), it still means you have to stick with that company for that amount of time.

If you find a better deal later – or move somewhere that your company doesn’t offer excellent coverage – you’ll have to pay through the nose to break the contract. If you break the contract early, you’ll probably also have to repay some or all of the discount you got on your phone when you signed up.

So, Which One Should You Go For?

Either of these options could work for you, depending on your circumstances. If you’re on a tight budget or want to avoid a contract, a prepaid plan will be a better fit. If you have no credit or bad credit, a prepaid plan might be your only option.

If, on the other hand, you want premium service and don’t mind paying a premium price, contract services would be a better option for you. These services are generally a better option for frequent travelers, t0o, because the large national brands offer nationwide (and, sometimes, international) coverage that’s fairly reliable.

Also, if you’re into having the absolute latest phone, the easiest and probably most affordable way to do that is with a contract plan.

But don’t just grab a Verizon plan because you want a good deal on the iPhone 5 or because you see their commercial most often. Take time to research your options so you can make the best choice for your needs and budget.

Published or Updated: April 16, 2013
About Abby Hayes

Abby is a freelance copywriter and blogger who writes on everything from personal finance to health and wellness. She spends her spare time bargain hunting and meal planning for her family of three.

Comments

  1. David says:

    Great post! I recently traveled overseas for a few weeks and when I had the option of going with a contract vs. buying pre-paid card, I went with the pre-paid card option. The service wasn’t as great, however, I was able to sync my iPhone with the foreign country’s service and only pay with using the cards. I think I ended up spending 30 dollars for 2 weeks of service. Had I gone with the contract, I’d have to rent a phone and pay per minute. I calculated it based on the amount of minutes I purchased and it came out to ~$70. Guess who ate a huge steak that night?? :)

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