Cell Phone: Prepaid vs Postpaid
Having used both service types, I have personally settled on using prepaid services for many different reasons. With this article, I’ll delve into the various aspects of both types of plans.
What is it? A post paid plan is a contract plan. With this type of plan, you are required to sign a 1, 2 or more year contract on your phone service on top of the cost of the phone. With a 2 year contract, the carrier will subsidize (or help pay for) the phone you wish to use. Instead of paying the full price for the phone (usually $200-600), the phone might cost $0-150 (depending on the phone).
In exchange for this seemingly less expensive price of the phone, you will incur an early termination fee to exit the contract early. This termination fee is anywhere between $175 to $325 (or more). Note that the early termination fee (ETF), may reduce in amount after the fourth month of service. So, the carrier might reduce the cost of the ETF by $10 per month every month after the fourth month of service.
As a note about your postpaid phone’s cost. Nothing in life is ever free. If there’s anything we need to learn, this is it. So, when a phone says that it is ‘free’ with 2 year activation, that’s where they get you. Having a forced 2 year contract, for example, they will more than make up for that phone’s cost in the 2 years. But, at the same time, you will end up likely spending more than the cost of the phone outright. So, subsidized phones look good until you do the math.
Postpaid Hidden Fees
There are many hidden fees with these plans. Postpaid plans give you a certain number of ‘primetime’ minutes included. These minutes may be used any time of the day up to the amount you contract for. For example, under a $40 per month plan with the iPhone, you might be allotted 450 ‘anytime’ minutes. Let’s calculate that price: 40 dollars / 450 minutes = 8.9 cents per minute. So, that’s basically 9 cents per minute minus taxes, fees and surcharges. You won’t know the taxes, fees and surcharges until you receive your first bill. Likely, the extra fees will raise that 8.9 closer to 10 cents per minute. Note that the 10 cents per minute price point is important in the prepaid part of this article.
Further, once you have used up your 450 minutes, the per minute rate goes up to a whopping 45 cents per minute! Ridiculous! So, be cautious with overage fees on postpaid plans. Unfortunately, postpaid plans and services don’t give easy access to usage information. So, you’re using the service blind. Again, see prepaid services benefits below.
With postpaid plans, you have the option of adding data plans (and with the iPhone, it’s pretty much required if you want to actually use it). With these data plans, the data overage charge depends on the plan you pick. With AT&T doing away with its unlimited data plan, you will need to review their new plans carefully to find out how this could affect you. With other carriers, like T-Mobile, Sprint or Verizon, you will need to ask these questions before you sign the contract. Both with your data service and your phone coverage, be sure to check the coverage maps to make sure it covers the places were you want to use the phone.
Signing a contract
Pick the right phone for your needs. Don’t pick a phone simply because it looks cool or is the thing to have. Be sure that this is the phone you want to use for the next 2-3 years. If not, you could be locked into a plan, service and phone without a cheap exit. Even if you do decide to early terminate and pay the fee, you may still not be able to unlock the phone to sell it. So, be careful when dealing with AT&T on this matter. If you let your contract run to conclusion, AT&T will likely be more amenable to unlocking the phone at the end. Note, however, that the Apple iPhone is exempt from unlocking due to contractual obligations between Apple and AT&T. If you want to unlock the iPhone, you will have to do it another way other than by asking AT&T. However, if you plan to travel overseas, you may be able to get the phone unlocked for that reason. You should call AT&T if you plan to travel.
Other hidden issues
When you apply for a postpaid cell phone service plan, this application is the same as filling out a credit card application. The carrier will run a credit check to determine credit worthiness. This credit check is listed on your credit report. So, depending on your credit score, you could be approved or declined for service. That may also be noted on your report. Any time your credit report is pulled to verify your credit worthiness, that’s a possibility for identity theft. The reason is that you don’t know what the carrier staff will do with that report once they are done with it. They could simply throw it in the trash which could end up fully intact in a dumpster by the curb. Anyone dumpster diving could find these credit reports and learn all of your credit card accounts. So, you should always be aware when someone intends to pull a credit report. You should also ask for that original report to be certified mailed back to you so that you can shred it yourself. Once they are done with the report, they have no more need of it.
With a postpaid plan, the carrier will send you a monthly bill that you must pay to continue service. If you fail to pay your monthly invoice, they can cut your service off and sock you for the early termination fee. They may also charge you a disconnect fee, a reconnect fee or both. Not paying your bill can give AT&T cause to write negative information into your credit report. So, it is up to you to ensure your payments are always received timely. Fighting with AT&T over postal issues or late payments is likely to fall on deaf ears. They’re a big company and really care very little for each individual. So, disputing your bill or not paying it can have serious consequences on you, but is really nothing to AT&T. They just want their money. If you don’t think you can commit to a monthly $40 (or higher) payment on an on going basis, then you should consider prepaid service instead.
What is it? A prepaid plan is a plan where you pay for your minutes and data as you use it. Prepaid plans now offer monthly service plans much like the postpaid plans, but do not require contracts or commitments.
Unlike postpaid plans, prepaid plans require no contracts, no commitments and no credit checks. This means you can start and stop service at any time without any penalties. Let me say that again, you can terminate service at any time without any penalties. Note, however, you may lose any remaining minutes left on your account unless you use them by their expiration date. So, if you want to terminate your service, finish all your minutes and stop paying for anything more. It’s that simple.
Because you sign no contract, you are not committed to continue service with any carrier under prepaid terms. However, because you are not committing to a locked-in length of service, that doesn’t come without other issues. For example, without a contract, carriers will not subsidize the phones. So, you will pay usually between $50 and $300 (or more) for your phone. For example, the retail price of an iPhone is $600. Most HTC Android phones cost about $400-500. So, this is what you will pay to buy the phone. Note that this is what you also pay on the postpaid plan, but the cost is hidden in the monthly fees. Most prepaid services do offer entry level phones. However, most of these entry phones usually lack things like an internet browser, GPS, bluetooth, maps and large touch displays. These entry level phones are just the basics. Enough to dial and talk, buy ringtones, limited browsing and limited data… and probably no apps.
If you want to use an iPhone, an EVO or any other data heavy smartphone, prepaid service may not offer the plans and features to fully support these devices. That doesn’t mean you can’t use smartphones on prepaid service, it just means you are limited in the types of smartphones that you can use. In other words, if you want an iPhone, you will have to buy into the postpaid plan as they are not yet supported on prepaid plan carriers. That may change eventually, but for now that’s how it is.
Prepaid plan costs
There are two basic types of plans: 1) Unlimited and 2) Pay-as-you-go. The unlimited plan is much like its postpaid counterpart. You pay a fixed amount of money per month, starting at $40, and you get unlimited text and minutes. These plans are great if you talk and text a lot. By ‘a lot’ I mean, enough texting and talking to make the per minute costs go down below 5 cents per minute or message. Once you have used this amount of service per month, then the plan begins paying for itself. This may require heavy usage to get to that point, however. Average or light usage might not be enough to justify that $40 per month fee.
For those who can’t justify an unlimited cost plan, there’s the pay-as-you-go plan. These plans charge you for only the minutes you use. These plans usually offer per minute rates at 10 cents per minute all the time. As I said above, I am circling back to discuss the per minute postpaid pricing in comparison with prepaid pricing. Note that the postpaid plan is 9 cents per minute for 450 minutes. After that, it’s 45 cents per minute. With prepaid plans, the cost is ALWAYS your per minute rate (usually 10 cents per minute). Never higher, rarely lower, it’s always the same month after month (unless the carrier specifically raises the rates and you can drop your service at any time without penalty). Also, your minutes will remain at the rate that you purchased them. So, even if they do raise the rates, your current remaining balance will be used at your purchased rate.
Prepaid plans offer the concept of rollover minutes. On the unlimited plan, this isn’t necessary. In prepaid plans, as long as you put more minutes onto your phone before the minutes expire, those minutes are extended to the next expiration date. So, you never lose any remaining minutes as long as you add more money to your account before those minutes expire. This same concept applies to postpaid plans if you don’t use all of the 450 minutes.
With a prepaid plan, it’s very easy to keep track of how many minutes you have left. Most carriers offer a phone number that will message the phone with how many minutes are remaining and when they expire. With postpaid plans, there is no tracking usage. In fact, they don’t want you to keep track. They want you to use that 45 cents per minute overage cost so they rake in more money.
Service Savings with Prepaid
Even though you are required to pay full price for the handset, it doesn’t have to be an expensive phone (unless you want it to be). However, this is the only major expense to prepaid service. So, once you have a phone, you can easily save money by using a prepaid account wisely.
Because there are no contracts, no commitments and no penalties, you immediately avoid all of those costly issues up front. In addition, the minutes you buy already include taxes, fees and surcharges. That means, you never receive a bill and never pay those ‘extra’ fees mandated by postpaid plans. Again, this saves you money. When you buy a top-up card or via credit card on the phone, you only pay the cost for the minutes. For example, T-Mobile charges $100 for 1000 minutes. That’s 10 cents per minute. These minutes expire in 365 days (one year). That means, you can spend $100 and never have to spend any more money for an entire year if you never use up those 1000 minutes. Also, T-Mobile’s minutes are used like credits. So, this money can pay for added features like data plans and extra services right from that minute pool.
Benefits and Drawbacks of Prepaid over Postpaid
- Easily track your usage and expenses
- Never overage charges
- Per minute charges are always the same
- Pay for exactly what you use
- No contracts
- No added fees, taxes, surcharges
- Never worry about a late bill (or bills at all)
- Minutes rollover as long as you top up before expiration (although, postpaid offers rollover too)
- Standard phone features (voicemail, three-way calling, caller ID, call waiting, etc)
- Minute cards can go on sale lowering per minute rates to 8 cents or less per minute.
- Limited data plans
- Full priced handsets (no subsidies)
Benefits and Drawbacks of Postpaid plans
- Better data plans and, sometimes, coverage
- Better choice of phones (usually)
- Handset cost is subsidized (cheaper up front)
- Can offer cost savings IF you use up your plan each month but do not go over (see drawbacks)
- Costly per minute rate overage fees (both minutes and data)
- Requires credit check
- Requires credit approval
- Requires contract
- Mandates early termination fee
- Adds surcharges, fees and taxes (more than prepaid)
- No ways to easily monitor usage
- Not designed for cost conscious consumers
Postpaid plans are designed for people with disposable income. These plans are designed for people who don’t watch their bills closely and who don’t mind the added charges when they run over. As such, postpaid plans do not offer mechanisms to control costs and random expenses. So, doing the wrong thing on the phone could add an accidental high cost charge to your bill (i.e., roaming into an out-of-zone area and using the data plan at per megabyte rates or running out of minutes). Because there are no tools to monitor usage, postpaid plans are not designed for the cost conscious consumer. If you want to keep a handle on your wireless service costs, then you should opt for a prepaid plan.
With prepaid service, the carriers all give methods to watch your minute usage, give alerts on how many minutes were used after a call completes and ways of determining current minutes left and when they expire. All of these tracking features let you determine when you need to pay more money to add minutes. On postpaid plans, the carriers decide when you pay and how much you pay.
With a postpaid plan, it’s very easy to go over your allotted minutes because you have no way to know that you just used up the last of your 450 plan minutes and it’s just the 15th of the month. That either means you need to be a zealot and check your minute usage often (you have to call customer service to get this information), or you need an app to track this data on your phone. If you happen to buy a phone that supports apps, you might be able to do this. Otherwise, you’re out of luck and will have to do it manually. You may be able to call customer service and get this information, but they only support limited phone hours and may not be able to give you this data in real-time.
If you’re a budget conscious consumer, a prepaid plan lets you track your usage exactly. You also only pay for exactly what you use. With postpaid plans, if you don’t use yours service for 30 days, you still pay the $40 (or whatever the plan costs). If you are using prepaid and don’t use the phone for 30 days, you pay nothing (unless you are on a unlimited prepaid plan). The single thing you must be aware is the expiration date. So long as you buy more minutes before the minute expire date, your old minutes remain and become part of your new minutes. The downside of prepaid is the lack of a solid data package to run phones such as the EVO, iPhone and Droid.
Finally, this last section is about the carriers themselves. The carriers that support prepaid services include TracFone, Net10, Virgin Mobile, Simple Mobile, MetroPCS, T-Mobile, Verizon, Sprint and AT&T. Some of these carriers only offer unlimited prepaid plans, others offer both unlimited and pay-as-you-go. Verizon, T-Mobile, Sprint and AT&T all offer both plans. Note that AT&T has introduced a new spin on the pay-as-you-go plan.
Ways to take your money
Not all prepaid services are equal. So, you will need to read the fine print for each of the plans. For example, some of the plans, like AT&T’s plan, take a $1 access fee on the days you use for phone. So, in addition to the 10 cents a minute, you also lose $1 on every day you use the phone. If you use the phone each day, that means $30 a month. So, you need to take this into account if you decide to use AT&T. The upside to this $1 access fee is that AT&T offers free mobile-to-mobile minutes. That means you can talk to anyone else on AT&T with no per minute charges. So, the $1 a day fee is all-you-can-talk mobile to mobile. That’s a great deal if you’re only calling AT&T phones. Talking for longer than 10 minutes with mobile-to-mobile equates to less than 10 cents per minute. The longer you talk with mobile-to-mobile, the cheaper it becomes during that day. You will also incur that $1 a day fee if you call a landline or someone who has a Verizon phone.
T-Mobile requires no access fee on pay-as-you-go, but they require $1 on Sidekick and possibly other plans. So, pay-as-you-go cost is always 10 cents a minute. However, T-Mobile doesn’t have any mobile-to-mobile minutes. T-Mobile also offers 365 day expiration period on 1000 minute packages (the best deal).
Virgin mobile offers 1000 minutes for $50. That’s half price from T-Mobile. The trouble is, the minutes expire in 1 month. So, you’ll end up spending $50 a month for those 1000 minutes. If you’re going to do that, you might as well go for an unlimited plan.
In other words, with prepaid there’s always some kind of thing you need to watch for, but that also goes for postpaid. With prepaid, each carrier offers some perk (or catch) that may help you save money (or spend money). A perk for someone might not be for someone else. You will need to review each prepaid carrier plan carefully to determine what works best for your needs and budget. From personal experience, T-Mobile has the most well-rounded plans and best service (least dropped calls) for my area. You may find that Tracfone works better for you. So, do your homework.