Prepaid Cellphone Plans: When to Make the Switch

Want to cut your expenses? Take a cold hard look at your monthly cellphone bill. Chances are you're paying for minutes (or data time or texting) that you never even get close to using.

Prepaid phone plans are one way to control those costs. Long used by parents who wanted their children to have access to a phone in case of an emergency (but didn't want them ringing up sky-high bills chatting with their friends), these plans allow you to pay only for the minutes you use. Not only that, but unlike monthly plans, most stop you from going over whatever limits you set.

In fact, many cost-conscious customers are making the switch to prepaid plans, says Allen Hepner, a research scholar at the New Millennium Research Council (NMRC), a Washington, D.C.-based nonpartisan think tank focused on telecommunications. According to a March 2009 study by NMRC, in the last six months, 17% of contract-based cellphone users switched to prepaid cellphones.

These plans, however, aren’t right for everyone. Consumers who spend more than an hour a day talking on their cellphone may be better off with a contract-based plan. And those who are still locked into a contract with their current cellphone provider may find that the early-termination fees they'd have to pay to get out of the contract far outweigh any savings they'd reap with a prepaid plan.

Here are five things you should consider before signing up for a prepaid plan.

Prices for prepaid plans can vary greatly based on the service provider, the amount of minutes or the city you live in, so it pays to do some research.

Many of the big carriers offer prepaid plans, including T-Mobile and AT&T (T). But you shouldn't neglect lesser-known prepaid providers, including Tracfone and Cricket Communications, says John Walls, a spokesman for CTIA, a nonprofit organization that represents wireless communications sectors. These companies tend to offer more pricing options and plans than the larger providers. Many also have partnerships with other local prepaid plan providers that offer extended coverage in what would otherwise be considered roaming areas.

For more on finding a cost-cutting plan compare cellphone plans at BillShrink.com and LetsTalk.com.

Most pay-as-you-go plans charge a set amount of money for each day you use the phone. If you only chat on the phone a few days a month then pay as you go might make sense. But otherwise, the charges can really add up, resulting in higher bills for less talk time.

Make sure the plan offers coverage in the areas you're likely to make phone calls, especially if you travel often or live in a remote area. For example, T-Mobile’s prepaid coverage includes most of the East Coast, but it gets spotty in the west, particularly around Seattle, Portland, Ore., and Las Vegas.

In addition, find out if the cellphone handset is GSM or CDMA service. GSM prepaid phones (also known as Global System for Mobile Communications) work throughout the country and are ideal for people who regularly make calls to or from other states.

CDMA prepaid phones, on the other hand, are best for those who stay local. Plans for CDMA phones (and for the handsets themselves) tend to be cheaper, says Rob Enderle, principal analyst at the Enderle Group, a San Jose, Calif.-based technology research firm. However, go into roaming mode and these plans can get pricey fast. With Tracfone, you’ll pay the equivalent of two minutes non-roaming use for one minute of roaming.

The average contract-based cellphone user pays $60 a month for roughly 200 talking minutes, says Hepner. “[But] a lot of people aren’t using all these minutes,” he says.

For example, AT&T’s cheapest individual contract-based plan starts at $40 per month for up to 450 minutes. A person who doesn’t use that many minutes can save $10 a month by signing up for a prepaid plan instead. AT&T's cheapest costs $30 per month and includes up to 200 minutes for local and long-distance calling within its U.S. coverage area, as well as voicemail and three-way calling.

While prepaid plans are relatively cheap, there are fees and other costs you need to watch for. Checking voicemail often gobbles up one minute and receiving or sending texts often wipes out 30 cents.

Also, keep in mind that you'll be required to purchase a handset. While with most monthly contract plans, the handsets come free or at a fraction of the retail price, prepaid plan users often spend $20 to $160 for a phone.