Smart phone savings: Avoid long-term contracts

Ralph Orlowsk/Reuters/File
In this October 2012 file photo, models hold a Samsung 'Galaxy S3 mini' (R) phone and a 'Galaxy S3' phone during the mini's world premiere in Frankfurt. If your usage is low, avoid those long-term contracts and you’ll wind up money ahead, Hamm writes.

Cell phone companies want you to sign a contract. It’s just a fact of life when picking out a cellular deal.

It makes a lot of sense for the cell phone company. It locks in a revenue stream for them that persists for two years (and has a solid chance of being extended beyond that). The only way that stream can be interrupted is if someone pays an early termination fee, which can be sizeable.

For them, dangling a phone at a low price as an incentive to sign a contract is well worth it.

The problem with a contract is that you can’t easily leap to another provider if you’re locked into a contract. If another provider has much lower rates than your current provider, you’re either stuck with your current provider or you’re paying a big fat early termination fee. 

The solution is to avoid long-term contracts, but contract-free cell phone service isn’t for everyone. Here’s how to figure out if it’s right for you.

The first thing you need to do is study your actual cell usage. What do you actually use your phone for? Sit down with your last few bills and figure out how much on average you use your cell phone, then round up to the nearest 100 minutes. The lower your number is, the better off you’ll be with a no-contract service.

Also, do you use data services or text messages on your plan? If your use of these is minimal, then a non-contract plan might be better for you.

A perfect example of someone who should avoid a long-term contract is my parents. My parents send somewhere in the ballpark of 20 messages a month and use perhaps 200 minutes of calls per month.

They are perfect candidates for a pay-as-you-go cell phone plan.

The first step they should take is shopping around with pay-as-you-go providers. What does it cost for a month of their usage with Boost Mobile (which is actually Sprint) or Virgin Mobile? What about Tracfone or other pay-as-you-go providers?

If these providers can offer a lower cost-per-month, then it’s a no-brainer to switch to them. Not only are they saving money each month, they have the freedom to go elsewhere whenver there’s an even better offer with another provider.

Even if the prices are roughly equivalent, you’re better off without the contract simply because there’s no termination fees and there’s the freedom needed to switch elsewhere if there’s a better bargain.

Pay-as-you-go isn’t for everyone. You need to really understand what you’re actually using (if you’re a new cell user, starting with pay-as-you-go is a good way to start), but if your usage is low, avoid those long-term contracts and you’ll wind up money ahead.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere.

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