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Prepaid cell phones: A real alternative?

Last week, we highlighted the problem of cell phone jail -- that helpless feeling a lot of consumers get when they are stuck in a long-term cell phone deal and the only way out is to pay a stiff termination fine, often $200 or more. Even if the service is terrible -- they're stuck.

There must be a better way, right? Well, there is. A number of Red Tape readers, and a consumer advocate group, suggest prepaid wireless.

Once marketed as a solution only for those on the economic margins, with bad credit, prepaid wireless is slowly going mainstream. If you want to avoid the restrictions of a long-term contract with a cell company that might not work out, prepaid phones are a great option.

As with many things in life, paying a little now can save you a lot later. But you've got to make some careful decisions.

Prepaid phones are sprouting up on the shelves of consumer electronics stores, though rarely on the same shelf as their glitzier, stickier companions from Sprint, Verizon and the other big boys.  Prepaid is still a small portion of the market, but it's not tiny.  Last quarter, 12 percent of cell phone purchases bought a prepaid plan, according to research group Telephia.

As with contract cell phones, the prepaid market is complicated by a myriad of options, and it's easy to get confused.  Buyers don't just compare phone prices or per-minute rates. There's also different prices for night and weekend minutes, within-system calls, rollover minutes, text message fees, and so on. 

Prepaid buyers also have a much bigger list of providers to choose from than contract buyers -- including Verizon, Cingular and the other household name brands.

That said, as a general rule you should be able to buy a no-frills phone for well under $100 and pay around 10 cents a minute for talking.  If you aren't a gabber, that's probably a pretty good deal.  If you talk about 100 minutes a week on the phone (that's one hour-long call to mom and 10 short calls to friends), you're paying $40 a month. Not bad, especially considering you can leave the phone behind at any time, no questions asked.  And, $40 is $40. You also escape those extra fees that come with monthly contracts, which somehow turn that $39.99 a month into a $52.37 charge.

And here's something else to consider: If you're the kind of person who really only uses the phone as an emergency back-up and only makes an occasional call while stuck in traffic, your monthly total could be even less under some plans. One of my editors, who has been a fan of prepaid wireless for years, says she averages about $25 a month using one of Virgin Mobile's plans. Best of all, she says, when she accidentally loses the phone under the couch for weeks at a time, she's not paying for phone service she's not using. She's also not paying for hundreds of unused minutes each month, like most consumers.

On the other hand, if you have a long-distance love affair to maintain, those free nights and weekends -- along with 1,000 anytime minutes -- might still be worth submitting yourself to a long-term deal. Big talkers should stay away from prepaid phones. 

Lots of 'gotchas'

Now for the details.  I put these off until this point because, well, there are lots of them, and it's a bit overwhelming.  Prepaid phone minutes often expire -- some as quickly as 15 days from purchase.  Other plans require you to buy more minutes after a certain amount of time even if you haven't used up your existing ones. Many plans require a daily access charge, as high as $1 per day. Others, such as Virgin Mobile, charge a higher rate for the first few minutes you use the phone every day. 

And of course, if you run out of minutes, you have to fill'er up somehow. There are cheap ways and expensive ways. If you've ever bought a calling card while overseas, you know that it's easy to misunderstand the real cost of minutes when tack-on fees are added into the equation.

"There are lots of gotchas," said Linda Sherry, who helped write a report on the prepaids for Consumers Action.  "If you just went out looking for one of these, you can end up scratching your head... But in the end we can recommend prepaid because you are not tied into a long-term thing."

Even with the strings attached, many consumers could end up with a lower wireless bill at the end of the year if they buy a prepaid phone and mind their own minutes.

Prepaid wireless is much more common in Europe, where consumers are not quite as comfortable with buying-on-credit arrangements as Americans.  As such, you'll see "top-up" stations all over; at ATM machines, in gas stations, at drugstores, at retailers. Some U.S. ATMs now allow recharging, but that's still rare.

It might get less rare, however, as general retailers stock up on pre-paid phones.  Wal-Mart has made a big push into the prepaid wireless market in the past year. Target, Circuit City, and Best Buy are also pushing the phones now, just in time for the Christmas season.

The gift of minutes

Sherry said the phones actually make a responsible Christmas gift.  For about $150, you can give someone a working cell phone with a few hundred minutes that will be good for about a year -- enough to take care of life's emergency situations.  That's a more thoughtful gift than a cell phone which requires a contract, which binds one of you to a monthly fee for two or more years.

Generally speaking, the more minutes you buy, the cheaper they are, and the longer you have before they expire.  Of course, since you don't really know how much you might talk, there's always a bit of gamble with buying such minutes.  In the end, the mobile company wins either way -- either you buy too many minutes, and they expire, or you talk too much and have to pay more.

Still, the biggest benefit of pre-paid phones is awareness.  It's similar to buying with cash instead of credit. Consumers paying with cash always buy less -- significantly less -- than those paying with plastic. It's human nature.  Pulling greenbacks out of your wallet feels bad.  Whipping out a credit card is almost painless.  So it is with cell phones.  If you know you can only talk so long before your money runs out, you talk less.  Spending less time on the phone is probably good for you, and for society, anyway.

And, there's no $200 early termination fee!

Buying a prepaid phone is complex and not for the faint of heart, however.  Here's some tips courtesy of Consumers Action. A full reading of its report is highly recommended.


  • Most prepaid minutes come with an expiration date. You pay less for a short-term expiration period and more for a long-term one.
  • The fewer minutes you buy, the more you'll pay per minute.
  • Even "pay as you go" plans have expiration dates and minimum purchase requirements.
  • Many plans require that you purchase a set amount of minutes each month or your phone will be deactivated.
  • Carriers that offer to roll over unused minutes from month to month usually do so only when you pay by the month or other predetermined schedule.
  • Daily access fees or a higher rate for your first minutes used each day may be required to get the lowest rates. To find the true rate, factor in these fees.
  • Some carriers charge as much as 45¢ per minute after your monthly plan minutes run out. Look for a plan that allows you to get more minutes at the same price if you need them.
  • If your plan is subject to a minimum minutes balance requirement, you may be required to purchase more time even before your account is totally depleted.
  • Calls placed outside your carrier's network (roaming) may not be included in the low rate plan and can cost up to 93 cents per minute.
  • International calls are rarely included in prepaid wireless plans, although some carriers include Puerto Rico or Canada in your domestic allowance, or offer an additional low flat per-minute rate to certain countries such as Mexico.
  • Directory assistance calls (411) cost extra — up to $1.75 for each call — in addition to your plan minutes.
  • Taxes and surcharges might be added to your monthly charge. Depending on the carrier, these charges might be included in your per-minute rate or added as a separate charge each month.