Contract-free cellphone plans were supposed to be easier to understand, but that's no longer the case. Washington state's attorney general recently blasted T-Mobile for its Simple Choice plan that turned out to be not so simple. T-Mobile was criticized for its new "no restrictions" plan, which, in fact, does have some restrictions. Oops!
It's time to pull out the calculator and take a look at the asterisks on those contract-free wireless plans to see if they really offer savings and headache-free convenience.
1) What's the difference between contract and payment plans?
Signing a two-year contract with a wireless carrier means paying a minimum upfront fee for a cellphone, with the true cost of the handset — and then some — included in the monthly bills. For example, Verizon Wireless charges you $99 for a 16GB iPhone 4S but locks you into a two-year contract.
With no-contract cellphone packages, you pay the full cost of a phone upfront. Virgin Mobile, for example, charges $350 for the same iPhone. But you subscribe one month at a time and can ditch the service whenever you want.
T-Mobile's new no-contract plans offer a twist. You have the option of buying a phone outright or providing a down payment, such as $100 for an iPhone 5 (it doesn't sell earlier models) or $110 for a Samsung Galaxy S III, and paying an extra $20 a month for two years.
2) What happens if I leave T-Mobile before the phone is paid off?
You have to pay whatever you still owe on the phone, immediately. This "balloon payment" is what got T-Mobile in trouble for advertising "no restrictions."
3) How does paying upfront compare to paying an early termination fee (ETF) for a contract?
Break a two-year wireless contract with Sprint for a Samsung Galaxy S III, for example, and brace for an early termination fee of up to $350 and a possible ding to your credit score if you can't pay the full ETF immediately. Some carriers shrink the ETF over the life of the contract. Verizon reduces its ETF by $10 each month. Sprint starts to reduce its ETF by $20 a month but only beginning with the 17th month of service.
With no-contract plans, your penalty is the cost of the device. Buying the iPhone 4S from Virgin Mobile ($450) and saying "goodbye" costs you more than an early termination fee of $350 with Sprint for the same phone.
Parting with T-Mobile for an iPhone 5 will cost you a balloon payment of $530 after one month of service but $20 less each following month, so time is a factor.
4) Can I sell my phone to recoup costs?
Yes. Gazelle and uSell.com buy some used AT&T, Sprint, T-Mobile and Verizon phones, but they are picky about the models. They won't accept phones from traditional prepaid providers such as Virgin, Boost Mobile and Cricket Wireless.
At the time of writing, Gazelle was paying between $130 and $175 for a Samsung Galaxy S III in good condition, for example. At uSell.com, it was $175. Gazelle would pay $205 for an iPhone 4S in good condition, and at uSell.com the same iPhone would fetch $255.
5) How compatible are AT&T and T-Mobile phones?
T-Mobile is marketing a "bring your own phone" plan for AT&T iPhones, but most of them don't work with T-Mobile's 4G data networks. You can call and text normally with an AT&T iPhone on T-Mobile's network, but your Net surfing is stuck at 2G speeds — basically good for only email, without attachments.
An exception is iPhone 5 models built after April 12, 2013, which have the technology to support both AT&T's and T-Mobile's 4G services.
6) Can I buy a used phone that will work with a contract-free plan?
Yes, if the network you are going to supports the device. Try Mobile Karma for refurbished smartphones with 30-day warranties. Another good choice is Swappa, which acts as a broker between buyer and seller.
7) Is it better to buy the phone outright or on a payment plan?
To save money, skip the contract, buy your own phone and pay as you go.
That beats the subsidized racket, which forces you to sign a two-year contract and keep paying for years — long after the handset cost is covered. A monthly $70 contract-free plan from T-Mobile, compared with a two-year $100 contract from Verizon, saves you $720 over two years.
Also note that T-Mobile's payment plan is interest-free. So it's a better deal than buying the phone outright if you use a credit card.
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