Read This Before Signing a Cell-Phone Contract

Choosing a cell phone plan
Choosing a cell phone plan

Why pay $649 for a new cell phone when you can get it for one-third of the cost? Slashing the price is just a matter of signing on the dotted line: All you have to do to earn that hefty up-front discount is stay true to a particular cellular plan for a while.

But what do you really get for your money in these shotgun weddings? Is a two-year contract really a fair trade for the discounts you're getting?

Like most relationships, it's complicated. Sometimes you come out ahead in terms of penny-pinching with monthly prepaid deals and sometimes you don't. But one thing is almost always true: The phone companies are indeed after your money. But you shouldn't just hand over your wallet without knowing what kind of plan you're getting.

Here's some background info on some plans you may be considering. Do your homework and the perfect deal is out there, somewhere.

Smart Choices for Smartphones

If you want an entry-level Apple (AAPL) iPhone 4 with 16 GB of internal memory, Verizon (VZ) or AT&T (T) would be happy to sell you one for just $199. Verizon will also tell you that the full retail price is $649, in case you'd rather not sign up for the plush two-year contract that both discounts require. (Ma Bell makes it even harder to find this basic information.)

What if you settled for a Verizon iPhone with a full two-year commitment and all the required extras? The asking price immediately drops by $450, or by $18.50 per month over the required two-year life of the deal. You're free to pick any calling and SMS text plans you like, from the low-end $39.99 option with 450 voice minutes per month and pay-as-you-go messaging to $89.99 for unlimited versions of both.

Here's the zinger: You are absolutely required to pick a data bundle as well. The cheapest one that qualifies for your discount deal, with 2 GB of high-speed data per month, costs $30 a month. Meanwhile, the price difference between committed and prepaid calling plans is consistently $5 a month, so let's call it a $25 monthly overage.

Now, $25 times 24 is $600, so if you were planning to use coffee-shop Wi-Fi connections rather than 3G or 4G wireless connections, you're paying an extra $150 for services you don't want. But hey, at least you'll be able to stream YouTube videos while driving down Alligator Alley.

3G/4G a Must-Have?

OK, so what if you actually want that 3G/4G add-on? The prepaid version costs exactly the same as the contract-bound one. In this case, you're paying $5 extra per month and you give up the $450 initial discount; you don't gain much by going your own way.

However, if you change cell plans like Imelda Marcos changed shoes, then you know the pain of parting ways with your phone service before your contract anniversary. The high breakup fees can be painful. In the case of AT&T, the $325 early termination fee is prorated by $10 per month of completed service. So cancel that contract one month before it's over, and you still get hit with a $95 charge.

With a prepaid plan, you have the option of jumping to another carrier such as AT&T, Sprint Nextel (S), or LeapWireless (LEAP) anytime you like without incurring a $350 early termination fee.

Dumbing It Down

I used the iPhone in the example above, but the same general trends hold for any smart- or dumb-phone on AT&T or Verizon.

A basic feature phone might be available for free with a two-year contract, though they're listed at a full retail price of $200. However, the same phone is then often available for something like $20 to $50 alongside a prepaid plan, for an effective two-year discount of nearly nothing. Except for the early termination nonsense, that is.

Shopping around may unearth the perfect plan for your needs, but the deal profiles are actually shockingly similar even when you're looking at Sprint or T-Mobile.

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For example, T-Mobile's 500-minute standard plan also costs $40 a month, just like the 450-minute ones from Verizon or AT&T. The 200-megabyte data plan adds $20 a month and also includes unlimited texting, so the little guys could help you feed those twitchy texting thumbs for less. Unlimited-everything prepaid plans go for $70 a month. But with slightly cheaper overall plans come smaller up-front discounts. A nice smartphone like the Samsung Exhibit only drops from $330 to $30 with a long-term contract, and that $300 discount includes an easy-to-forget $50 mail-in rebate card.

Everything I just said about T-Mobile also applies to Sprint, except that these guys prefer 450-minute plans to T-Mobile's 500. Also, Sprint asks you to learn the minute differences between its two prepaid brands, Boost Mobile and Virgin Mobile, before buying anything.

Pay Even Less for Two-Year Deals

If you're content with two-year contracts and the discounts they bring, don't forget to look around for additional deals. Sprint currently charges $30 for a fully discounted Nexus S 4G smartphone, but it's currently free at Best Buy (BBY) or Wirefly. And don't forget about business accounts. That phone still costs $30 for a small-business customer, but the calling plans are generally $10 less per month.

Personally, I'd actually do even better with one of the daily plans with high per-minute charges instead of a month-by-month alternative because I spend less than an hour on the phone every month. Through the magic of computer-based calling tools like Google (GOOG) Voice or Skype, plus the fact that the people I talk to the most are on the same wireless network, my billable minutes are as rare as hens' teeth. That's an extreme example, I know, but these options actually work out well for some people.

The Final Verdict

Of course, all these rates could change tomorrow. Also, the precise discount deals may vary, as do the minimum requirements to qualify for a deduction in the first place. Just remember, the prenuptials in this marriage are usually better for the corporate half of the union.

In the end, you're typically weighing long-term freedom versus short-term sticker shock of buying a $600 phone, even if it would save you money and headaches in the long run.

Motley Fool contributor Anders Bylund owns shares of Google, but he holds no other position in any company mentioned. The Motley Fool owns shares of Apple, Best Buy, and Google. Motley Fool newsletter services have recommended buying shares of Google, Apple, and AT&T, as well as creating a bull call spread position in Apple.

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