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Should you switch to prepaid phone service?

Carriers offer more options, but savings may not add up.

By Karen Datko Apr 26, 2010 10:30AM

This Deal of the Day comes from Kelli B. Grant at partner site SmartMoney.

 

As carrier competition for cell phone subscribers heats up, switching to prepaid service is the most obvious -- although not always the best -- cost-saving strategy for consumers looking to cut their bills.

 

Prepaid plans, which let users pay for service as needed without a contract, are attractive for their low costs (as little as $10 a month, compared with $40 for a contract plan) and flexibility to chase better deals. The slow economy has made them even more appealing. “No one wants to be stuck paying big bills [under contract],” says Schwark Satyavolu, the president of cell phone comparison site BillShrink.com.

 

New prepaid subscribers outnumbered those signing contracts for the first time ever in the fourth quarter of 2009, accounting for 65% of carriers’ 4.2 million new accounts, reports the New Millennium Research Council, a telecommunications think tank.

 

Earnings reports last week reflected that shift, with AT&T and Verizon both stating that they added fewer new contract subscribers during the first quarter of 2010. Of AT&T’s 1.9 million new customers, only 513,000 of them signed a contract. In a recent earnings call, AT&T CFO Rick Lindner said the carrier plans to continue to make changes to its reseller and prepaid businesses to drive growth, but that its focus remains on contract accounts. “We won't do things that could bring a significant impact or a negative impact to our post-pay business,” he said.

 

Although most of the major carriers have a prepaid service option, much of their new business actually stems from reselling prepaid services to smaller providers that don’t have their own networks, says Delly Tamer, chief executive of LetsTalk.com. For example, Verizon underwrites Wal-Mart’s new Straight Talk prepaid service. Sprint doesn’t offer plans of its own, but counts among its brands Boost and Virgin Mobile USA.

Consumers interested in prepaid have plenty of other provider options as well, including Metro PCS, Leap Wireless, Tracfone, and Cricket. Picking a plan is even more complex. Depending on the provider, users might have a choice to pay as they go with pre-purchased bundles of minutes that expire after a set period, or pay by the day with a per-minute rate plus a daily charge for days they use the phone. Some providers also offer a flat-rate monthly plan for a set number of minutes, similar to a carrier contact offer but without the commitment.

But with so much competition, the savings from switching to a prepaid plan aren’t often as significant or immediate as many consumers hope. Before ditching a contract, consider these six factors:

 

Minutes used. People who talk 100 minutes or fewer each month almost always come out ahead with prepaid. For everyone else, savings depend more on how often you pick up the phone. “If you’re even a relatively modest user of your cell phone, prepaid plans start to become less attractive,” Satyavolu says. Per-minute rates are typically higher than with a contract plan, so talking and checking voicemail adds up quickly. Some plans also charge a daily use fee of $1 to $4, which eats into savings. “You might end up getting very close to post-paid [contract] plan pricing,” he says.

 

Prepaid can be a good deal for big talkers, though. Boost Mobile offers an unlimited talk, text and Web plan for $50 per month, Wal-Mart has one for $45, and Metro PCS and Cricket both charge $40. That’s $20 to $80 cheaper than carriers’ comparable unlimited contract plans, Tamer says.

 

Services needed. “If you’re not inclined to want to use apps, then prepaid really deserves attention,” says Sam Simon, chairman of the Telecommunications Research and Action Center. Carriers often require data plans on smart phones, adding an extra $30 to the bill whether the user plans to take advantage of the phone’s capabilities or not.

 

Number of plan lines. Those on a contract family plan are likely to find that it’s more cost-effective to stay put. “A family of four or five is close to the tipping point, where the family plan becomes a good deal compared with paying $45 for each person,” Simon says. Compare use line by line, and use text and data add-ons only on lines that need them.

 

On the flip side, prepaid can provide a safe way to separate out your text-happy teen’s bill to avoid unpleasant surprises, Satyavolu says. (One-third of teenagers send more than 100 texts per day, according to a recent Pew Research Center study.) “When you run out, you don’t have a phone anymore,” he says.

 

Phones. Without a contract, providers have little incentive to subsidize phone costs. Most also don’t allow new subscribers to bring in phones from another carrier. Paying retail price for a handset limits flexibility to chase better prices at other carriers, Tamer says. For example, on T-Mobile, a Samsung T239 is $5 with a two-year contract, or $40 with prepaid service. Someone signing up for a 500-minute noncontract plan ($30 per month) instead of a contract one ($40) would need to stick with the service for four months to break even.

Consumers looking for a trendy or feature-laden phone may also be disappointed. Popular handsets such as the Motorola Droid and iPhone aren’t available on prepaid networks, he says. Many offerings lack features such as a camera, Web browser or full keyboard.

 

Call quality. Most prepaid providers use a major contract carrier’s network, so switching could mean swapping say, AT&T for -- AT&T. To limit the risk of poor connections and dropped calls, ask the prepaid provider whose network it’s using and then check that carrier’s site for area coverage maps.

 

Landline cost. Consumers could save more by eliminating a landline rather than scaling back on wireless. Wireless-only households use 332 more cell phone minutes per month than those with a landline -- but spend $33 less a month on phone service, according to market researcher Nielsen.

 

Related reading at SmartMoney:

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