New Smartphone Math: Pay for Your Phone, Save on Your Plan
Don’t hesitate to ditch your contract, especially when it means keeping money in your pocket.
In recent years, wireless carriers have vied for smartphone market share by offering flexibility: no-contract, lower-price service plans for customers willing to pay full price for a phone. Now, with nearly every cell phone user a smartphone user, providers are applying that model to all their plans, eliminating the hefty subsidies that longtime customers relied on to knock hundreds off the price of a phone. “The market was based on subsidies for such a long time that the U.S. consumer might think the price of the latest iPhone is $200,” says Brad Akyuz, a director at NPD Group, a market research company. You may no longer be tethered to a two-year contract, but you’ll pay the retail price for your new smartphone, either up front or in monthly installments.
T-Mobile led the charge in the spring of 2013, when it discontinued two-year contracts. The other three major U.S. carriers—AT&T, Sprint and Verizon—responded with similar, voluntary programs. But in August, Sprint announced that it was eliminating long-term contracts, and Verizon said it would eliminate long-term contracts for all new customers. (AT&T recently stopped offering contracts for sales made at third-party stores.)
How the new plans work. Will the imminent death of the two-year contract and subsidies cost you more or save you money in the long run? That will largely depend on how often you upgrade your device and how much data you use (most no-contract plans include unlimited calling and texting).
You’ll be able to upgrade immediately or end service with your current carrier by paying off the remaining balance on the phone. If you forgo another upgrade, you can continue using your current phone and start seeing the benefits of the lower cost of service. The savings should be about $15 to $25 a month, says Logan Abbott, president of Wirefly.com, a Web site that compares phone plans. So if you continue using a paid-off phone for even one more year, you’ll save $180 to $300.
Let’s say you’re ready to upgrade to an iPhone 6. With both Sprint’s and Verizon’s new plans, you’ll pay $27 a month for two years for the 16-gigabyte model, which retails for $650. Sprint charges $20 a month for 1GB of data (and as much as $100 for 10GB), plus a $15 to $25 monthly fee per smartphone to access the service. Verizon’s data plans start at $30 a month for 1GB of data (and run as high as $80 for 12GB), plus a $20-per-month line access fee. That’s a price break compared with the older contract option: roughly $200 for the phone up front, plus $90 a month, including $50 for service (calls, texts and data) and typically a $25 or $40 access fee.
What you should do now. Whether or not your contract has expired, talk to your mobile carrier about your options. For example, if you are an existing Verizon customer whose contract is up, you may either opt for a no-contract plan or renew your two-year contract and upgrade your device with a subsidy. (If you switch to a no-contract plan before your contract is up, you’ll pay an extra $20 a month per line until the contract would have expired.) Bottom line: It’s a good time to re-shop your service, says Akyuz. “Some plans are really appealing,” he says. “And you gain the freedom to go with another carrier if you see a better deal in a year or so.”