Is a Pay-as-you-go Plan Right for You?

Comparing Types of Mobile Phone Plans

While contract-based cell phone plans are the norm in the United States, plans that allow you to "pay as you go" and prepaid service plans have been popular throughout Europe. These types of plans have grown in popularity in the U.S., however.

Freedom From Contracts and Complexity

The allure of being liberated from a long-term contract and never having to worry about early termination penalties is attractive enough for some people.

The flexibility and freedom to change devices and usage habits while paying only for the amount of service you actually use is very attractive.

While many contract-based plans take into account changing habits, such as with “flexible” plans and “rollover” features, the ability to use 100 minutes in one month and 1,000 the next, for example, is the pay-as-you-go person's focus. 

What's more, these extra features in contract plans inevitably invoke a raft of qualifications, limitations and general fine-print complexity that the free-wheeling pay-as-you-go user often doesn't have the time or the patience to sift through to figure out if the contract plan is actually a good deal.

Types of Cellphone Plans

There was a time when your cellphone was technologically bound to your carrier. For example, when the iPhone was first released, it was only available on AT&T's service; you couldn't take a phone from AT&T and switch it over to Verizon, for example—at least not without some difficulty.

This led to "jailbreaking" of phones. Eventually companies dropped the "locking" of cellphones, giving users more freedom. This makes considering alternate plan options easier.

There are basically four different types of cellphone service plans:

  • Month-to-month
  • Pay-as-you-go or prepaid
  • Contract (usually two years)
  • Payment plans, phone cost broken up into installments payments with early trade-in option

Pay-as-you-go Plans

If you know exactly how much you'll be using your phone and in what ways, pay-as-you-go can be an attractive option. It can also be somewhat complicated, too, as pay-as-you-go plans and how they charge you can vary considerably from one provider to another. When shopping for the best plan, you will need to not only carefully examine your usage habits but also the details of the pay-as-you-go plan to ensure it matches your habits. 

Staying within your pay-as-you-go parameters and habits can net you some savings, but straying outside these rack up unplanned costs quickly.

Contract Plans

The biggest attraction for contract plans is the subsidized cost of getting a new model phone. For example, a top-of-the-line new smartphone is quite costly if you buy it outright, but by signing a two-year contract the cost of the phone is subsidized by the provider, lowering the upfront cost significantly.

The downsides are the aforementioned restrictions on changing carriers thanks to prohibitive early termination fees, but also "activation fees" that are often charged when setting up the service.

The savings you got on the phone's purchase price is now being chipped away.

Month-to-month and Payment Plans

These two plan options are more recent offerings in the mobile phone world.

Payment plans are for those who want the latest devices, want to change them regularly, aren't interested in reselling their old phone and don't want to pay the full cost of a new phone upfront. These plans often allow users to "upgrade" to newer model phones before their standard contract term is up by trading in their old phone. Convenient and easy to set up, but you pay for that convenience.

Month-to-month plans give you the freedom to tailor your mobile plan to your needs, such as your data allotment each month, and still allowing you to get features like unlimited texting.

The pain in a month-to-month plan is in the upfront cost: You pay full price for the phone, no subsidies. However, if you can take the upfront cost, month-to-month will generally save you money—but you will have to shop around. The major carriers like AT&T and Verizon offer month-to-month plans, but they generally push customers toward contract plans, so their month-to-month plans are often less attractive.