Cell Phone Contracts Are Debt, You Just Don’t Realize It
That’s right, it wasn’t a typo: most cell phone contracts are creative ways to package debt. It sounds harsh, but if we dissect the relationship it will become glaringly obvious.
You sell your cell phone soul to Sprint, or Verizon, or AT&T and in turn they give you a phone for a great price or even free. In return you agree to purchase monthly services for usually two years. You can’t switch providers without paying huge fees and you are required to shell over a hefty sum each month. That sounds a lot like the same type of prison that debt offers. It robs you of choices and puts the company in control, not you.
If you still don’t think that sounds enough like debt, let’s take a closer look at the iPhone 3GS which was recently all over the news. Many iPhone fans recently purchased an ‘old’ iPhone 3G for $199 and signed a 2-year contract. They now want to upgrade to the shiny new phone and AT&T told them to pound sand. They can wait until a year into their contract and then purchase the new 3G S for $400 not the $199 that new customers are paying.
The truth of the situation is that cell phone companies fork over fancy new phones for a cheap price, but you have to sign up for a two year contract so they can make up the lost cost. Don’t believe me, try buying an iPhone or the Palm Pre type phone without a contract. They are hundreds of dollars more.
Basically, the cell providers are floating you a loan which is paid off after two years when they have recouped their money and much more. The scary part is that a lot of people don’t even realize that they are entering a debt type relationship with cell phone companies and are really confused when things go bad.
Let’s run the math.
iPhone power user total cost
$200 phone + 24 months of $150 service = $3800(before taxes and fees)
Palm Pre power user total cost
$200 + 24 months of $100 service = $2600(before taxes and fees)
That is a lot of money people pay for a $400 dollar loan so that you could by the phone for $200 dollars instead of full price. Like I said, cell phone contracts are debt.
There are other options. Buy an iPod Touch for $229 and go for a pre-paid phone plan($80 a year) for a total of $389 for two years. Yep, I just saved myself well over two grand and stayed out of debt.
What do you think? Are cell phone contracts debt?
*Sources:
AT&T Isn’t Cheating iPhone 3G Customers(via Ray @ Bathtub Brewery)
Pre vs iPhone, Which Is Better Value?
Setting Up a Prepaid Virgin Mobile Cell Phone Account
Low Minute Users Save With Prepaid Cell Phones
I am on the fence with going to the next iPhone. I actually have the first generation iPhone and it is serving me well. I would really like the updated features of the iPhone 3gs, but my internet costs would jump another $10 and I’d have to pay extra for text messaging. Right now, I get unlimited internet and 200 text messages for $20 a month.
I’ve also been thinking about going with an iPod touch, so save even more money. It’s convenient to have internet in my pocket, but do I really need it? My job does not necessitate it, but it is nice to have when I am out and about.
Cellphone services could be seen as debt. You often don’t realize how much you spend on it in that two year period. I may just go a cheaper route to save my family more money.
Could you explain your math? Maybe I am missing something or you left it out of the explaination.
$200 phone + 24 months of $90 service = $3800(before taxes and fees) I get $2,360
$200 + 24 months of $70 service = $2600(before taxes and fees) I get $1,880
Also, I am not sure if I agree with it being a debt. It is more of an expensive utility. We also have a life long contract with the water company to pay what ever they decide to charge, unless we want to dig a well.
@Xander – Thanks for the numbers questioning. I accidentally put in the lowest tier contract instead of the power unlimited plan price. The final numbers are still the same.
I have an iPhone 3G for the primary reasons of Internet in my pocket and a do-everything device. I don’t want to carry two devices and I want Internet just a click away.
What kind of debt allows you to pay $175 to have it forgiven?
@The Happy Rock
Why are we running the numbers with such a high plan? We are obviously looking at the bare minimum on the prepaid plan with iPod Touch. I pay around 100 dollars a month for my AT&T w/iPhone contract. Could I get something cheaper? Yes. Would I get near as much use out of it? I doubt it.
I accept there are people out there that do not use a cellphone to its full capacity, I on the other hand use almost every feature that has been added to the iPhone. Maybe it just goes along with working in the computer industry. I do get my money’s worth out of it.
Very well put Happy Rock. I’m liking the latest shift though in the industry towards Pay as you Go phones. There seems to be a lot more options out there today compared to a couple years back.
I have an iPhone 3G and while the new features of the 3GS sound nice, they aren’t enough of an improvement over the the 3G to justify purchasing a new phone. Also, I purchased my iPhone refurbished so it was even less than buying new. Plus refurbished Apple products have been in use less than 30 days and appear new.
I was initially against the purchase of an iPhone when we were shopping for a new cell phone (DH and I share). But then DH really wanted it. He found the refurbished one on the Apple site and I told him to go ahead. we took it on a 2-week road trip where I dot to be the primary user. That is all it took. The phone is primarily mine now.
You are ABSOLUTELY Correct!! I am looking forward to Pay-as-you-go when my contract ends next month. I’m paying for tons of minutes that I don’t use. I hate it.
Its like cable TV. You are paying for the service, when you are not home.
Companies are always trying to trick us into things. Thanks for enligtening me on this subject
Interesting perspective. Keep in mind, however, that most cell contracts offer an out as long as you pay the early termination fee (ETF). Thus, while it’s definitely a commitment to pay, the full amount of the contract isn’t really a debt (at least not to me).
A third choice…I’m not on a plan or “pay as you goâ€. I had a plan with Sprint, but it ended a year or so ago, and I just never renewed it. For me being with Sprint is far cheaper than if I get a “Pay as you go” plan. I’m paying $80- per month for 2000 minutes, and I use most of them. On Boost mobile that would cost $200- per month. Is there a cheaper “pay as you go” plan or is everyone here low minute users? When my contract ended I just never renewed. My only dilemma is that now I want a new phone and I have to either sign back up or pay the higher equipment cost. Even though I hate to pay the higher equipment cost I might…because the service without a plan has been AMAZING! If there’s anything wrong with my bill they fix it almost no questions asked. I even called up once when I went over my minutes, and told them I wanted them to lower the bill and they did…just because there is that idea that they might lose a customer! There is some (albeit small) amount of negotiating power that you gain by being with the phone company and not on a plan…and personally I think that Sprint is far clearer than other companies. Because I don’t have a landline and I have family on the East Coast it’s also important for me to have a clear connection. My Mom occasionally mentions how clear I sound, and that she forgets that I only have a cell. No…I don’t work for Sprint…they can be very difficult…but I have been with them for over 10 years…no landline for 7 of those years.
Dean
If you buy into a prepaid plan (pay as you go) there is no contract. I pay about $100 a year and get 30 minutes of airtime each month. May not sound like much if you have to gab all day long, but i use my phone only when really needed, not to idly chat. Works fine for me.
For those who don’t need the latest and greatest, there are some good options out there that don’t require a contract. The choice is out there, you just have to find it! For example, I work with a national cellular provider called Consumer Cellular, consumercellular.com, which offers free phones with plans starting as low as $10 a month without a contract. The plans are post paid so you have the benefit of convenient monthly billing but without the downsides, like early termination fees that lock you in. Plus, Consumer Cellular is an MVNO, meaning it buys wholesale minutes from the large carriers and resells them to customers, ensuring the same level of service as the big players.
I only had a cell phone in high school because my parents paid for it. Ever since then, I’m on a minimal plan and use my phone very little.
Hmm, I’m not sure that I actually believe it to be debt per se, though I see your point in having it founded within the same principles. But, I also think there’s more that goes into it then what you’ve presented here. I got the Palm Pre and I absolutely love it! I have my calendars and email all synched up, and the the smallest touch, I know what I’ve got going for the day. I was also able to synch a work dc with ALL of my DVDs listed alphabetically, which I find handy to have on hand when I’m shopping for DVDs so I don’t double buy. I get a lot of use out of this phone and I’ve had it for less than two weeks.
I also don’t mind the contract because I like Sprint. I guess I’d feel differently if I didn’t, but it’s not that bad in my opinion. Plus, with Sprint, after a year they give you $75 off a phone and after two years you get $150 off the phone, so I think that’s a pretty good deal.
Interesting post!
@All – Thanks for all the great comments. The point of this article was to help get us to think. It was to help evaluate our spending on cell phones and see if it provides enough value for the cost that you are agreeing too.
The biggest question outside of the ETF fee is whether or not you are getting value for your money. Most people say they are, but I am not always convinced. It is really a personal call, but seeing the numbers in a two year some often helps to clarify.
@Ray & nickel – Very true, so at a minimum you are in $175 of debt. The funny part is though, that ETF fee often is enough of a mental roadblock that people justify spending hundreds or thousands to finish out the contract.
@Ed – Glad you are almost done.
@Dean – Pay as you go is definitely a low minute user thing. If it is your only phone that a plan is a must. The math for buying the new phone would be whether or not you would save more than the ETF fee on a new fancy phone. Interesting thoughts on the no contract negotiating power.
@TheHappyRock, I agree wholly with your take on this. Cell phone contracts are debt, packaged as something else. I’m all for prepaid plans and if that means I can’t have the latest and greatest smartphone, so be it.
The gap between contracts and prepaid is smaller than most people think and in some cases does not exist anymore. I see prepaid plans nowadays that are competitive or even beat contract on price-per-minute evaluation. Recently we saw a few offers on $50 unlimited plans – all from prepaid providers.
The prepaid plan I currently use is called StraightTalk from Tracfone and gives me 1000 minutes, 1000 texts and 30mb of data for $30. Free 411 calls and all the usual benefits of Tracfone apply, of course. Now you have to agree that that is not a lightweight package but it is cheaper than most equivalent contracts out there. Without any hidden charges and all the usual bill frustrations or the contract.
For me there is just no reason to sign a two-year contract if I can get what I need without selling my cell-soul.
I got an iPhone 3G for the primary reasons of Internet in my pocket and a do-everything device.
really good analysis of this aspect of everyday life. Anything that means you don’t pay for it up front is debt. I’m not saying that all debt is wrong, i don’t subscribe to that theory, but nor should it become normal. As soon as it becomes normal then that’s when the steady slide into debt can occur. I would NEVER pay for a mobile contract that ties me in for a specific period i.e 12/18 months because i don’t know what state my finances will be in by then. I prefer pay as you go
I agree. I gave up on contracts about a year ago now and went with tracfone prepaid for this very reason. I don’t need more debt for a phone, I have plenty already. At times I miss a contract phone but overall not much has changed and I’m saving money.