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End of Cellphone Contracts Could Be Good News for Consumers

AT&T will no longer offer discounted phones with two-year contracts starting Jan. 8. Before you rush out to beat the deadline, consider that you might be better off paying full price for the phone. That's because phone companies also reduce the monthly bill for voice, text and data services when you buy your own phone or bring a used one.

Some may pay a bit more, some a bit less, but the overall bill is roughly the same. What you get in return is more flexibility in which phone you buy and how long you stay with the carrier.

AT&T to stop offering 2-year contracts in 2016 0:16

AT&T's decision comes as no surprise. In the third quarter, only 1 in 5 customers chose a contract plan when they signed up with AT&T or upgraded their phones. T-Mobile broke away from contracts completely nearly two years ago, and Verizon stopped offering contracts to new customers in August. Sprint also has been weighing dropping contracts completely.

Sprint CEO Marcelo Claure told The Associated Press in September that discounted, contract phones — including his company's — amount to "a gimmick, a trick. You tell people I'm going to give you a free phone, but really the customer pays in a more expensive service plan."

Indeed, phone discounts mask the true costs of phones and phone services. Here's an explanation of the changes:

WHAT ARE MY OPTIONS NOW?

Most people now buy and pay for phones in monthly installments, though you can also pay the full price upfront. You can also bring a used device, such as one from a friend or family member who has upgraded to a newer model. Sprint and T-Mobile also have leasing options — you pay less each month, but you don't get to keep or resell the device in the end.

WILL I PAY MORE?

Not necessarily so, even though you now have to pay the full price for a phone. When you got a discounted phone under contract, you were already paying the balance in the form of fees. For instance, the full cost of an iPhone 6s is $650. Although you pay just $200 at the contract rate, the phone company passes along the remaining $450 in higher monthly fees for voice, text and data. Over two years, the $450 comes to $18.75 a month. Put another way, your phone company is subsidizing your phone by $18.75 a month and tacking that on to the phone bill for voice, text and data.

If you forgo the contract, your monthly bill for voice, text and data is typically reduced by $15 or $25 a month. The $25 discount applies for higher data plans — usually ones you share with family members. In such cases, you're actually better off buying the phone yourself, as you're getting a $25 bill reduction but giving up only $18.75 in subsidies. If your discount is only $15, and you're giving up $18.75 in subsidies, then technically your bill is going up slightly. What you get instead is flexibility.

Related: AT&T to Ditch Two-Year Contracts on Jan. 8

WHAT DO YOU MEAN BY FLEXIBILITY?

Because phone companies were subsidizing phones, there was an incentive to get the most expensive model, even if you didn't need that. These days, there are many mid-range Android phones that do what high-end phones did just a few years ago. If you choose one of those models, you keep the savings. That's also the case if you get a friend or relative's old phone. You no longer feel that you're losing out by not claiming the most expensive phone in a contract renewal. And if your phone lasts longer than two years, there's no longer the pressure to upgrade just to claim the phone subsidies. You simply pocket the savings. More important, you're no longer tied to two-year contracts.

DOES THIS MEAN I CAN SWITCH WHENEVER I LIKE?

Yes and no. If you buy a phone under an installment plan, you're still stuck with the phone company until you pay off the phone. That said, rival companies often have promotions to pay off the balance for you. And if you pay the full cost of the phone upfront, you own the phone and can switch whenever you like. Just be aware that certain phones work on limited number of networks, so it's still not total freedom.

WHAT IF RATES INCREASE ONCE I PAY FULL PRICE FOR A PHONE?

Phone rates can go up at any time, but that historically hasn't happened because of stiff competition. In fact, phone companies have been offering more data for the same prices, an effective price cut. And if your phone company does increase the rates, just go to another. Again, rivals typically offer promotions to switch. You can always take your phone number with you as long as you sign up with the new company before cancelling.

Related: Smartphones and the Internet Are Eating Our TV Time: Nielsen

CAN I STILL GET A SUBSIDIZED PHONE?

Sprint still offers contract plans, though they aren't emphasized and they may disappear any day. Verizon offers contracts only to existing customers who renew. At AT&T, contracts will be offered only under certain business plans.