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How Prepaid Cellphone Plans Work and How They Can Save You Money

How Prepaid Cellphone Plans Work and How They Can Save You Money

When it comes to cellphones, for the longest time I was most definitely a super Luddite. I don’t remember when I got my first one, but it was long after they had become mainstream.

Note: If you don’t care about my history with cellphones, you can skip straight to the informational section of this post here.

To give you a sense of how little I used my first phone (an LG flip phone) I had a Verizon pay-as-you-go plan, which meant I only paid for service when I used the phone, something like 15 cents a minute. I would top up my account with a $100 payment, which wouldn’t expire for a year and which would roll over as long as I topped up again before the expiry date. I used the phone so infrequently that at one point I had a $300 credit on my plan! (I ended up using most of it up after the Haiti earthquake when I could make text donations for relief efforts.)

I had absolutely no interest in having a smartphone until I ended up in the hospital for 6 days for minor surgery and had no way to get online to let people know I was there. (My computer’s hard drive crashed the day before I was admitted. Yeah, that was a good day… )

When I started looking at smartphones, it seemed like I was completely incapable of typing on a touchscreen keyboard and actually hitting the key I meant to, so I went with a Samsung Galaxy S, which had a lovely slide-out physical keyboard that I could handle. The full price of the phone was $399, but I got it for $199 because I signed up for a 2-year plan with Sprint. I chose the plan ($80/month) because it included unlimited data, which I knew I would use a lot more than the 450 calling minutes that came with it (see Phone, Never Use above).

I was pretty happy with this arrangement until I read this post in August 2012:

Prepaid Cellphones Are Cheaper. Why Aren’t They Popular? >>

It pointed out how much less expensive prepaid plans are over the course of the two years of a contract, even with the higher upfront cost of the phone. After I read it, I started checking out carriers with prepaid plans but I didn’t see a phone I really wanted at that time. However, that article stayed with me and a year later I saw an ad for a sale on the Samsung Galaxy S3 ($399, regularly $550 at the time if I’m remembering correctly) at Virgin Mobile to use with their prepaid plans. I bought it and signed up for the $35/month plan, which included unlimited calls, texts, and data. So with $45/month in savings, it took less than 10 months before I had made back the cost of the phone and every other month since then was gravy. Sweet!

Unfortunately, what wasn’t sweet was the service. Virgin Mobile USA runs on the Sprint network, which I hadn’t been particularly happy with when I was a direct customer of theirs. I would frequently have difficulty getting a signal when I was out with friends who had no problem with their carriers. Also, data speeds seemed really slow to me. A simple Google search could take a minute to return results, which are just text. The Virgin Mobile plan also didn’t include hotspot capability even when the phone supports it. You have to pay extra for it, which I didn’t have to do with Sprint. (Hotspot capability lets you use your phone’s cell network to create a wi-fi hotspot when you’re somewhere that doesn’t have actual wi-fi service. It lets you have Internet access on your computer or wi-fi only mobile devices wherever you are.) And finally, I go to Canada a couple of times a year and Virgin Mobile USA has no partners there to provide roaming service. So I had to buy a separate phone just for those visits and I had different issues with that, which I won’t go into here. Verizon charges extra for roaming but at least it’s available.

Before I signed on with Virgin Mobile, I did check with other carriers but at the time Verizon didn’t have what I needed. But about a year later, I checked it again and discovered they had a prepaid plan I liked for $45/month. It doesn’t include unlimited data, but since I use my phone primarily at home where I have wi-fi, I realized the 500MB/month would probably work fine for me (you can get another 500MB if you use AutoPay to top up your account).

Since my phone was just a year old, I figured I’d hold out a while longer before switching but the fates had another thought in mind. As I mentioned in this post about lessons I learned when switching cellphone carriers, my phone completely died after a software update a couple of weeks ago. I could have had the phone replaced under the insurance plan, but since I had already been thinking about switching to Verizon, I decided to do it right then. (It didn’t hurt that they were having holiday sales on some of their phones right then as well…) And I was able to take advantage of another one of the big benefits of a prepaid plan—no cancellation fees!

So now I’m Verizon’s AllSet plan with a new Motorola Luge (the model name for the prepaid version of the Droid Razr M). To be honest, I haven’t had it long enough to be in situations to see if I’m getting better cell service than I was with Sprint/Virgin Mobile, but given my friends’ experiences with Verizon, I’m optimistic!

So now that THAT story is over with, here’s the 411 on prepaid cellphone plans. (Pun totally intended. ) 🙂

How do prepaid plans work?

There are different types of prepaid plans. The kind I had at Virgin Mobile and the Verizon Allset plans work a lot like standard contract plans. You pay a certain amount of money every month and you get some combination of talk minutes, text messaging, and data for that amount. You pay up front (hence the “prepaid” term) but that doesn’t really feel any different than paying at the end of the billing period.

The extras included in the plan will vary from carrier to carrier and phone to phone. For example, I have access to Verizon’s 4G LTE network where available because the phone I bought supports it. They have other prepaid phones that don’t. (Note: I’m completely incapable of explaining the differences between different types of cellphone technologies; I just know that LTE is the most advanced one currently available, whatever that means…)

As mentioned above, my Virgin Mobile plan included unlimited data and the Galaxy S3 I had with them had visual voice mail whereas Verizon’s Allset plan only offers visual voice mail on iPhones. But given that the written transcriptions produced make text autocorrect look like a genius, that’s hardly a reason to choose one plan/phone over another.

The other prepaid model is pay-as-you-go, which means you basically only pay when you actually use the phone. However, there are different flavors of this model as well. For example, Verizon has a per-minute plan and two per-day plans (one includes unlimited talk and the other includes unlimited to Verizon customers and 10 cents/minute for all other calls). These are great for people who just need a cellphone infrequently, like for emergencies.

Which carriers offer prepaid plans?

In the U.S., in addition to Virgin Mobile and Verizon, Sprint, AT&T, T-Mobile, and Boost Mobile all offer prepaid plans. I’m sure other carriers do as well, but these are the big names.

Can you use any phone with a prepaid plan?

Nope. Each carrier has its own list of phones that you can use with their prepaid plans. And what you can use for a monthly plan may be different than what you can use for a pay-as-you-go plan. (The latter usually doesn’t include smartphones).

Historically, prepaid plans limited you to a lower level of phone, but they now offer iPhones, Galaxy S5s and other biggies, although usually not the most recent model available.

Some of the carriers allow you to use a phone you already have BUT it must be compatible and that rules out a lot. For example, even though Verizon offers the Galaxy S3 with its prepaid plans, I couldn’t use mine even if it hadn’t died because the technology Virgin Mobile uses is different than the one Verizon uses. The carriers’ websites will let you know if you can “bring your own device” and you can enter your phone’s ID to see if it qualifies.

Can you keep your existing phone number?

Probably. I was able to keep mine but I know there are some situations where you can’t. Unfortunately, I can’t explain what those situations are. However, the carrier will ask you during the signup process to enter your existing number and they’ll let you know if it can’t be transferred.

Are there other benefits of prepaid plans?

In addition to not requiring a contract (and therefore no contract cancellation fees), most prepaid plans don’t require a credit check since you’re paying up front and they often waive activation fees if you activate online.

What are the disadvantages of prepaid plans?

The main one is that you have to pay the full cost of the phone up front. For higher end phones, that can be several hundred dollars. But again, the savings in the monthly service charge will more than make up for that cost in most cases as long as you can actually afford it in the first place (and if you’re not being hit with a big cancellation fee for an unexpired contract).

Tip: You can get cash back for purchasing prepaid plans from many of the carriers listed above if you use Ebates. (Learn more about the Ebates cashback program here.)

Also, there’s no such thing as a family plan with prepaid phones. It’s one account per person. So if you need multiple phones and lines, you may be better off with a contract plan. I’ve never been part of a family plan so I have no idea how that pricing works.

Finally, as mentioned earlier, you’ll have a more limited choice of phones available to use with a prepaid plan.

Anything else you should know?

Not specifically about prepaid plans, but if you do get a new phone, I recommend you check out this post before activating it:

Lessons Learned from Switching My Cellphone Carrier >>

Elizabeth Kricfalusi

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