Cheap Talk: Why a Pay-as-You-Go Phone Plan May Be Worth It

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Given the choice between paying now or paying later, most people will choose later, even if it costs them more money.

At least that’s how it relates to cellphones, according to a report last month by research firm Ovum. It’s an irony that costs consumers hundreds of dollars as more people decide to buy a less expensive, subsidized phone with higher monthly fees on a two-year contract, instead of a prepaid phone plan that requires paying the full price for the cellphone but has lower monthly rates and no contract.

There’s no such thing as a free lunch, which is true with the inexpensive cellphones that carriers sell in exchange for contracts of a year or two.

Most American mobile phone users are choosing the more expensive contract plans, and are unable to overcome the psychological hurdle—or even the hurdle of pulling $650 out of their pockets for a new iPhone 4S—of paying a big upfront fee.

Ovum found that 23 percent of wireless customers in the United States have prepaid phone plans, also called pay-as-you-go plans, while the remaining 77 percent have long-term contracts with higher monthly fees.

Take the unlimited talk/data/text plans from Virgin Mobile and AT&T for the newest iPhone 4S: Virgin Mobile offers it for $650 upfront for the real cost of the phone and charges $55 a month, while AT&T sells the subsidized phone for $200 and $70 per month for service with a two-year contract.

It’s only a $15 per month savings with Virgin (although it has cheaper plans), meaning it will take 30 months—two and a half years—to make up the $450 difference in the cost of the phone with Virgin. Like refinancing a home mortgage and not staying in the home long enough to make the refinance fees worthwhile, getting rid of a prepaid phone early is a waste of money. The savings would triple by going with Virgin’s $30 monthly plan that allows only 300 minutes of talk time and requires paying regularly with a credit card.

After getting a free phone from AT&T two years ago and paying $70 a month for service for two phones, Christine Hanson of Greensboro, N.C., was fed up with the high monthly cost and switched to Virgin Mobile and now pays $54 a month to keep two Android phones running. Paying $600 or more for an iPhone wasn’t in her budget, Hanson says.

“I am not an early adopter of technology,” she says. “I wait until it gets cheap. I can’t afford to be first in line.”

While phone reception has been good, Hanson says Virgin’s poor customer service and a few billing problems have been the major downsides.

Beyond the hassle of being locked into a two-year contract, Bruce Mendel of Pennsylvania says he recently left a contract plan when he found the prepaid smartphones from Net10 to be just as good as anywhere else.

“I was always looking at Net10, but I didn’t like their phones that much,” Mendel says.

Net10 now allows shoppers to BYOD, or Bring Your Own Device, by buying a SIM card and taking their phone with them to Net10. Unlocked phones are more expensive than locked phones, which can be transferred among carriers, but Net10 accepts locked phones, says Mendel, who has worked in the mobile phone industry.

He now pays $50 a month for unlimited talk and text, instead of the $120 he was paying Verizon.

Paying to get out of a contract can add more time to how long it takes to recoup the savings of buying a more expensive phone while on a cheaper monthly plan. Durdana Ricchiuto of Cary, N.C., paid about $130 to get out of a contract with AT&T, then paid $200 for a new Android phone from Straight Talk, and $50 a month for the new plan.

Ricchiuto says it will take about six months for the savings to pay off, and is glad to be done with the poor phone reception from AT&T.

For people on a budget, having a prepaid phone may be the best way to go if they can get over the psychological and monetary barrier of paying upfront for a phone that isn’t subsidized.

Consultant James Dabbagian chose that route because his income fluctuates too much to stay on a contract, so he has a prepaid phone with T-Mobile. But when he feels his income is a bit more stable, Dabbagian wants to go back to a contract phone. Why? So he can buy a better phone with the latest technology.

“Buying” a phone when signing up for a two-year contract doesn’t seem like the right term for such a purchase. It’s more like buying on an installment plan — with higher monthly payments.

Aaron Crowe
Aaron Crowe is a freelance journalist who specializes in personal finance topics. He has written for Wise Bread, AOL, AARP, Bankrate and other websites that focus on financial literacy and saving money. He has also worked as a newspaper reporter and editor. You can follow him on Twitter @AaronCrowe.

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