New World of Cell Phone Contracts

Know What You Are Paying For

For years, cell phone users have been weighed down by the ball and chain of the dreaded two-year contract that locked you into a carrier. Terminating a contract early triggered prohibitive cancellation fees. This model has slowly been changing over time to allow greater ability to switch between carriers, thanks in part to carriers willing to buy out customer's contracts to switch to their services.

Verizon's announcement in early August that service contracts would be eliminated likely signals the end of the traditional cell phone service contract. Sprint followed suit, announcing that service contracts would be eliminated by year's end. T-Mobile eliminated service contracts two years ago.

That leaves AT&T as the only one out of the four major carriers that allows contracts -- although AT&T has a monthly option through family sharing plans. Service contracts are available but not publicized. Contracts are strongly discouraged in favor of family data-sharing plans. It is likely only a matter of time before AT&T eliminates contracts as well.

In essence, with all carriers, the cost of the phone is being decoupled from the service. The traditional contract included a higher monthly bill to subsidize all or part of the cost of your phone. The latest model was available for a few hundred dollars, while the previous model could usually be acquired for practically nothing but an activation fee. With the decoupling, it will be clearer what you are paying for within a mobile plan.

The methods of paying for the phone and the voice/data packages offered will be the distinguishing mark between carrier's plans. Undoubtedly, some customers will suffer from sticker shock as they see the price of the newest generation phones -- often in the $600-$700 range for the more desirable models. Even lower generation phones typically cost in the range of $200-$400. However, once customers find out how much they actually paid in extra monthly fees over the life of the contract, those prices fall into perspective pretty quickly.

Verizon and AT&T allow you to pay for the phone upfront or spread it out in installments over a certain amount of time. The installment payment plan is similar to the service contract, as you are still paying for the phone in your monthly bill -- you can see how much of your bill is related to the phone, and after the assigned payment period, the cost of the phone drops off your monthly bill. There is no contract holding you to that carrier, but the remainder of your phone payments will be due in full if you switch carriers.

Sprint and T-Mobile are going for the lease method. Each carrier offers a monthly phone-leasing fee. After the terms are complete, you can trade the phone in for a newer model. As with Verizon and AT&T, it is the terms of the phone that keeps you with the carrier and not a service contract.

The other dirty little secret that limits mobility is that not all phones are compatible with every carrier's system. Each carrier has a slightly different technology for 2G voice systems and runs the 4G data on different bandwidths. The phone must be capable of running under both conditions, and lower-end phones may not have that capability.

You can bring a phone that you already own into a new carrier's mobile plan, but it is important to verify that the phone you own will work with the system of the carrier you want to switch to, and what limitations may apply. Carriers have great incentive to have you continue to purchase or lease phones through their stores.

Perhaps the greatest beneficiaries of these changes are smartphone users who do not feel the need to upgrade constantly to the latest model. Under the old subsidized plan, these users continued to pay a monthly fee on a phone that they already owned outright. In essence, these customers were giving away money to the carrier in exchange for the "freedom" of not committing to another contract.

Within some family plans, it may be possible to accommodate the family Luddite by giving him or her your old phone once you upgrade, if theirs is an even older model. If you own the phone, you may be able to have your carrier switch the phone to a new SIM card and only pay an activation fee to be good to go. Check the rules with each carrier as they may change over time (again, the incentive rule applies).

In general, the demise of the service contract is a good thing, because it makes the costs more transparent. Now, it is all about the phone. If you think that you may be switching carriers within a short period or plan to shop around, choose your phone and your payment method wisely.