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Prepaid vs. Contract Cell Phone Plans – Differences, Pros & Cons


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These days, cellphones are more popular and powerful than ever before. According to Pew Research, 96% of Americans own a smartphone, and the days of clunky flip phones are long gone.

However, while mobile technology and accessibility keeps improving, costs haven’t taken a hit. In fact, according to the Bureau of Labor Statistics, the average person spent nearly $1,200 on their cellphone plan in 2018 and have seen consistent increases in cost.

Thankfully, there are several ways to lower your monthly cellphone bill without sacrificing service quality. A common strategy is to switch to a prepaid phone plan, which is often cheaper than fixed-term contracts with major carriers.

If you want to find a cheaper phone plan and stay flexible, prepaid phone plans are certainly worth considering. However, you should understand the differences between prepaid phone plans and contract plans, as well as the pros and cons of making the switch.

Prepaid vs. Contract Cellphone Plans — What’s The Difference?

If you haven’t done a lot of cellphone shopping, it’s easy to get confused when searching for your next plan. Additionally, you might hear the terms “prepaid,” “postpaid,” and “no-contract” plans thrown around.

A prepaid phone plan is what it sounds like. You pay upfront for your monthly phone usage, deciding how many minutes, texts, and gigabytes (GB) of data you think you’ll use. When you run out, you have to wait until the next month for your minutes, texting, and data limits to refresh unless you buy more during the month to hold you over.

In contrast, contract cellphone plans are more rigid arrangements that are common with major service providers like AT&T, T-Mobile, and Verizon. Plans are typically two years long, and you choose from a variety of monthly plans that include different amounts of talk, text, and data. The cost of your phone hardware is usually built into your monthly bill even though many contract phone plans advertise new phones as being $0.


Advantages of Prepaid Cellphone Plans

The differences between prepaid and contract cellphone plans might seem irrelevant. However, there are several advantages of prepaid cellphone plans that also cut costs. If you want to save money on a tight budget, prepaid carriers might be your best option.

1. Lower Monthly Cost

The main advantage of prepaid phone plans over contract plans is lower pricing. With a prepaid service, you have the freedom to buy exactly what you need. If you only text, SMS-only plans are available. You can also find plans that offer unlimited calling and data if that’s what you need.

For example, Verizon’s unlimited talk, text, and data plan is $70 per month for an annual contract. Its unlimited prepaid phone plan is $60 per month, which is $120 per year in savings for the same services. Additionally, if you don’t need unlimited data, you can find prepaid options that are even cheaper compared to their contract plan counterparts.

There may be exceptions, but on average, prepaid phone plans are almost always cheaper than their contract equivalent. Plus, many prepaid plans don’t charge an activation fee, so you don’t have to worry about an expensive first month.

2. Flexibility

Another advantage of using a prepaid phone plan is flexibility. Contract plans usually last two years. If you want to switch carriers for better service or to save money, you typically pay a termination fee or have to buy out your contract before leaving.

This fee often makes it impossible to leave before your contract is up because the cost is simply too high. With prepaid plans, there aren’t contracts to hold you back. If you want to try a new cellular service, you’re free to make the switch at any time. If you’ve ever been stuck in a costly contract, you’ll understand the benefit of this freedom.

3. No Credit Check

Contract cellphone plans usually require a credit check for approval. This is because mobile carriers want to mitigate the risk that you won’t be able to pay your phone bills on time.

Carriers want to see a good credit score. Therefore, if you’re in the process of improving your credit score, you might find it difficult to get approved by certain carriers. In this instance, going with a prepaid phone plan is an easy solution. Prepaid cellphone plans usually don’t require a credit check because you pay upfront for service, eliminating the risk that you won’t pay your phone bill.

4. Abundant Features

Prepaid phone plans used to have limitations, especially for data and calling. These limitations made them inferior to contract plans for several years, although today this trend has changed dramatically.

The amount of competition between prepaid mobile phone providers and improvements in cellular networks has put prepaid phone plans on par with contract plans. There are numerous carriers that offer unlimited talk, text, and data plans at competitive rates. Plus, network coverage and data speed has improved over the years.

Many prepaid phone providers actually piggyback off the cellular networks from the three major carriers, AT&T, T-Mobile, and Verizon. This enables nationwide access and data speeds that suffice for regular Internet usage and even streaming. Your prepaid plan might not be as fast as a top-tier plan from a major provider, but the savings are worth it.

5. No Overage Fees

An easy way to waste money with a contract plan is to go over your limits. Because you pay at the end of each month, overage fees are a real threat, and there are plenty of horror stories of people racking up $1,000 phone bills accidentally.

This mistake is easier to make than you might think. An accidental tap on the screen can turn off your phone’s Wi-Fi, making you rapidly drain your data. Similarly, if you don’t get the right roaming package, good luck the next time you travel internationally.

Prepaid phone plans eliminate the risk of overage fees. If you use your limits, your service stops until your next payment or until you buy additional usage. If you’ve been stung by overage fees in the past, prepaid phone plans are your best protective measure.


Disadvantages of Prepaid Cellphone Plans

Prepaid phone plans are affordable, flexible, and remarkably competitive with contract plans. However, there are several downsides to consider.

1. Family Plans Are Often Superior

Contract phone plans are more expensive than prepaid phone plans for individuals. However, major carriers sweeten the deal for families or with service bundling, which can make their price-per-phone more competitive.

For example, the same unlimited Verizon plan that costs $70 for an individual only costs $35 per phone for a family of four. Other carriers usually have similar family deals that significantly lower their monthly price. Although contract plans still lack flexibility, they certainly suit larger households from an affordability perspective.

If you haven’t cut the cord for cable, you can also consider bundling your phone and cable service with different contract providers to potentially save more money.

2. International Limitations

Because many prepaid phone plans use existing U.S. cellular networks to provide service, they aren’t always the best for traveling internationally. However, most major carriers let you buy a pay-as-you-go add-on for international roaming or upgrade your plan during a trip.

Prepaid phone providers like Mint Mobile have recently added roaming capabilities, so it’s becoming easier to save money on vacation as a prepaid user. However, don’t expect this feature for every prepaid cellphone plan.

If you frequently travel for work or are trying the digital nomad lifestyle, some international-friendly prepaid phone plans include:

  • Keepgo. Buy a prepaid travel Sim card and Wi-Fi hotspot plan that works in over 100 countries. Prepaid data Sim card plans are only $8 per 1GB of data you use.
  • Google Fi. Enjoy unlimited data and texting while abroad and calling for $0.20 per minute with the $70 per month unlimited plan. Alternatively, a flexible travel plan costs $20 per month and provides unlimited texting and $0.20 per minute calling. You can also buy data for $10 per gigabyte with the travel plan.

Again, your existing carrier might make it affordable to upgrade your plan for your next international trip. Check your options before making the switch to a prepaid phone plan if you have upcoming travel plans.

3. Upfront Hardware Cost

Contract plans work hardware price into their monthly cost. While this is one reason contract plans are more expensive than prepaid plans on average, the upfront cost of having to buy a phone separately is a drawback for prepaid plans if you’re living paycheck to paycheck.

If you want the latest smartphone model, you usually have to buy it upfront with a prepaid plan. Some prepaid providers offer financing, but this increases the long-term cost of your phone.

Many prepaid plans allow you to bring your own phone, provided it’s compatible with their monthly plans. Ultimately, this means the easiest way for many people to switch to a prepaid phone plan is to finish their existing contract and then bring their own device.

4. Speed Throttling

Most cellphone plans throttle data speed after a certain usage amount. For example, AT&T sometimes reduces data speed for different unlimited data plans when customers use more than 22GB or 50GB in one billing period. They also throttle speed if their network is too busy.

Because many prepaid cellphone plans use major cellular networks, their customers aren’t the priority for maintaining data speed. This means many prepaid plans offer 5G and 4G LTE data speeds but only for a certain amount of data before throttling kicks in.

For example, the popular prepaid cellphone provider Tello throttles 4G data to 2G speed on unlimited plans after you use 25GB. This is a common practice for prepaid plans, even for unlimited data users.

This isn’t a deal-breaker unless you require fast data speeds and considerable usage limits per month. However, potential speed reductions are worth keeping in mind if you switch to a prepaid phone plan.


The Best Prepaid Phone Plans

If you’re convinced that prepaid cellphone plans are for you, there are several affordable options worth researching:

  • Boost Mobile. The least expensive unlimited plan costs just $35 per month for unlimited talk, text, and data. You get 3GB of 4G LTE data; afterwards, speed reduces to 2G. You can opt for a $50-per-month plan to get 35GB of data at 4G LTE speed instead.
  • Cricket Wireless. Enjoy unlimited data, talk, and text within the U.S. for $50 per month when you set up auto pay. Cricket has cheaper prepaid phone plans that don’t include unlimited data. You can also add international calling to your plan if needed.
  • Mint Mobile. Get unlimited talk and text and 3GB of data per month for only $15 per month if you commit to three months. Afterwards, this plan renews at $25 per month. You get 5G and 4G LTE data speeds, nationwide coverage, and can add international data plans. Mint is undeniably one of the least expensive prepaid cellphone providers on the market.
  • Tello. Build your own plan or choose from existing options. Tello has budget prepaid phone plans starting as low as $5 per month without data. However, data plans are still affordable. For example, 2GB of data and unlimited talk and text is only $14 per month. Unlimited data is $39 per month.
  • Straight Talk. Get unlimited data, talk, and text for $34 per month when you set up auto pay. Unlimited data has 4G LTE speed for the first 5GB before dropping to 2G speed.

As mentioned, major carriers are also becoming more competitive with their prepaid phone plans. Their prices aren’t as low as companies like Tello or Mint Mobile, but family deals and potentially better coverage might make them superior depending on your cellphone needs.


Final Word

One of the simplest ways to become more frugal is to find ways to save money on the things you already buy. Cellphone plans aren’t an exception. Plus, because the annual cost of phone plans steadily increases each year, you can find some major savings by switching to the right prepaid phone plan.

Once you choose the right cellphone, take time to shop around for plans before jumping into a contract. Prepaid phone plans are becoming more competitive each year, and if you can find one that suits your needs, you’re looking at potentially hundreds of dollars in savings per year.

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