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Contracts: Should I Sign?
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Considering the purchase of a new or replacement cell phone? Some providers offer contracts with phone purchases, but is it in your best interest to enter into a contract?

Contracts are not new to the cell phone market, but in the late 1990's many of the service providers allowed people to buy inexpensive cell phones without contracts due to the fierce competition within the North American cell phone market. Now that the market has almost reached saturation, many of these service providers are returning to signed contracts to ensure that their customers remain with them for 24-36 months.

Contract Advantages:
  • Your monthly rate will not increase over the contract period, provided that you stay on the same rate plan
  • The phone purchase may be reduced by $50-$150 or more over not signing a contract
  • You might receive a billing credit a few months into the contract
  • A network setup charge may not apply ($25-$50)
  • You might receive bonuses, such as free incoming minutes, caller ID, or voice mail

Contract Disadvantages:

  • You are restricted in your monthly plan for the contract duration (rate increases are permitted, but not decreases)
  • If you lose or want a new phone, you purchase that phone at the full, non-contract price, if you are still on a contract
  • If you break the contract then there is a penalty, often the price of the remaining months on the contract
  • Contracts often require a minimum monthly fee, which might be more minutes or features than you might use
As you can see, there are both advantages and disadvantages to the signed contract. So why are some of the providers and cell phone stores so eager to set you up on a 1-3 year contract?

Contracts for the Service Providers

Contracts guarantee income for a service provider and that is the basic reason behind wanting you to sign a contract. Many cell phones on the market today cost the service provider more than they sell them for (i.e., they take a loss on the phone). If a particular cell phone was $400, would you buy it? How about if the same phone was $150? Likely the cheaper phone looks more appealing to your finances, but to the service provider they would take a $250 loss if the phone was $400 at cost for them. Service providers hope to recover that loss plus make a profit on you over the lifetime of the phone, which ironically is about the length of a 2-3 year contract. If a service provider has a customer sign a contract, then they are guaranteed that they have a source of income over the contract length. A non-contracted customer (commonly referred to as a "month-to-month contract") may terminate their service with the service provider at any time without penalty. If the service provider hasn't recovered the cost of the phone from a month-to-month customer, then they take a loss.

In North America, there are four different flavours of digital cellular technology: GSM, CDMA, tdMA, and iDEN. These differences mean that you cannot use your phone with a different technology -- for example, you can't use a GSM phone on a CDMA network. This prevents most customers from jumping between providers due to different technologies in use and if a customer does want to switch to a new provider, then a new phone purchase is very likely. But what if you leave your CDMA provider and decide to go with another CDMA provider? Service providers try to protect their handset investments not only with contracts, but also by crippling the handsets they sell. This means that it will be very unlikely that you could use your existing phone with another provider using the same technology. In fact, some people have purchased an identical phone model to use on a different network because they were unhappy with their previous service provider.

Contracts for the Customers

Since contracts often offer a reduced handset price, one can think of a contract as the same as a monthly payment on a phone. It's not worded that way in the contract; essentially by signing a contract you get a phone at a cheaper price, but the provider is more likely to make additional profit from you since you are guaranteed to pay the minimum monthly fee to cover the difference in price between a non-contract and a contracted phone price. If you feel that you could not lay out $250 for a phone given your current financial situation, then if the phone was available for $100 with a contract you might be able to afford the initial layout of money and know that for the next 1-3 years that you will have a monthly bill of a certain amount.

Stable rates are one of the guarantees that service providers offer customers on contracts: usually the rate plan you sign on will not change in price over the contract length or that the plan rate can only be increased on the contract anniversary date. Month-to-month customers are at more of a risk of being hit with a rate jump at any time.

There are other bonuses as well for customers that sign contracts -- or you can think of it as penalties for customers that don't sign contracts. These include a waived activation fee, bonus monthly features, and more. In fact, if you do decide that you do want to go onto a contract, then make sure to ask for any extras that you feel should be in the contract, especially if a competitor service provider is offering something or if you have been with a particular service provider for many years.

Contracts for Pre-Existing Customers

If you are replacing an existing cell phone with the same service provider, then you are in the unique situation where you can either continue on a month-to-month basis under your old contract or sign a new contract and receive whatever bonuses that might be offered, plus likely receive a discount on the new phone.

Often the same contract or rate plan that you were on with your old phone isn't offered anyone. Many of the older plans included extras that may now not be available with the new contract plans. These might include per second, not per minute billing, call display, voice mail, or other features that if you want to continue to have under the new plan then you will have to now pay a monthly fee for. Often service providers are reluctant to grandfather their plans when you purchase a new phone, but before you do sign a new contract, step back and see if your old plan still suits your needs and if you were to take on a new plan, would you pay more per month to have the same features as the old plan where they were free. You might just find that the up-front discount for the contract might not be as cheap if you have to purchase more monthly airtime for the per minute billing or for paying for features that used to be free under your old plan.

Should I Sign?

The best recommendation I can suggest is to assess your personal situation. Will you still be living in the same place over the contact length? Do you usually use the amount of minutes and features that would be included on the contract plan? Do you expect to purchase a new phone when your contract expires? And so on.

Check out the competition and not only see what they offer, but see what extras they will offer if you state that a competitor service provider offers the same plan for the same price, but bills by the second, not by the minute (or whatever). Visit the service provider's web sites; talk to sales people in a few different stores; and check out reviews and options on this web site and others over providers and how others feel that they are being treated by their service provider after signing a contract.

The Bottom Line

I personally cannot recommend signing a contract or going month-to-month as it depends on YOUR needs. If you are looking to purchase a new or replacement phone, then you've already started your research by reading this article. Whatever you do, don't walk into a cell phone store and jump into impulse mode and purchase a phone and sign a contract without fully understanding what you are getting yourself into. There are both disadvantages and advantages to contracts and this balances out as an individual choice. You can always ask the cell phone store for a copy of a contract for you to take home and decipher without the pressure. In the end, you'll feel much better and more informed over your decision to sign or not to sign.

Do you have a comment or story to tell about contracts? Post it on our forums at GeckoBeachForums.com.



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