Published: February 21, 2009 06:14 pm      

MONEY: Prepaid cell phones help dial up lower costs

By DAVE CARPENTER

AP Personal Finance Writer



CHICAGO (AP) — Marty Focazio knew his cell phone calls were costing him a lot, but it was still a bit of a shock when he did the math and learned just how much it was per minute.

Using a spreadsheet to tally up the total monthly charges including taxes for all his voice minutes and text messages, he discovered he was paying as much as 42 cents each for his 400 to 500 minutes a month. Not exactly what the provider had touted.

"You see the ad that says $59 a month, but then you add it up and you realize, 'Holy crap, my phone bill is $120 a month!'" and sometimes much higher, said Focazio, of Upper Black Eddy, Pa.

So he did the budgeting equivalent of dialing 911: He turned in his smartphone and got a prepaid model from TracFone without all the bells and whistles. Now he has spent $160 total on it in the five months since.

"It's nice to just have an extra 50 or 100 bucks a month," said Focazio, 44, a strategist at a digital media agency in New York.

Prepaid phones, which provide a set number of minutes, are becoming a more appealing financial option as careful household budgeting becomes paramount in a tight economy.

Cell phone users who switch to them can cut their monthly spending significantly — particularly those who talk 300 minutes or less a month, says the Telecommunications Research and Action Center, a Washington, D.C.-based nonprofit.

That, of course, is precisely why service providers prefer long-term contracts instead. Most don't advertise prepaid plans widely, instead targeting them largely at low-income users. But all major carriers offer prepaid phone plans, and consumers are increasingly signing up.

The number of U.S. prepaid wireless subscribers is estimated to have grown by some 19 percent as the economy slowed last year, a climb of nearly 8 million to 49.5 million. This year the number of users is expected to rise another 13 percent compared with just 3 percent for contract subscribers, according to the Yankee Group, a Boston-based research firm.

"Certainly with the economy being what it is, prepaid is resonating even more," said Jayne Wallace, spokeswoman for Virgin Mobile USA, which sells its prepaid phones in outlets like Wal-Mart and Target stores and drugstore chains. "Prepaid is now a viable option for more people."

It's still a much less popular option than in other developed countries, where prepaid cell phones typically account for a third or more of consumer phone use. Here, the figure remains just under 20 percent despite the recent growth.

A combination of consumer uncertainty and myths about prepaid phones appears to explain why U.S. use is lower, according to the New Millennium Research Council, a non-partisan think tank in Washington, D.C., specializing in telecommunications issues.

Many people wrongly assume that switching to prepaid would always incur expensive termination fees on their existing contract, the group said. Others figure they'd have to change cell-phone numbers, which isn't generally the case. Or they simply don't know what prepaid is all about.

The basics on prepaid plans are this: You buy a phone for anywhere from $10 to $200 and then pay for use in advance, based on the carrier's specified rates for each minute of talk or text message. You can replenish your minutes when you run low or wait till the phone goes dead when they're used up.

Plan options differ. While the snazziest phones such as Apple's iPhone generally aren't available under prepaid, you can still find models that take pictures, play music, offer e-mail or provide Web access if you're willing to pay a higher initial cost.

Even the loquacious can benefit.

Consumer Reports said in its January issue that a family with two cell phones that talks 700 minutes per month could save $100 to $220 a year buying per-minute packs from Virgin Mobile as opposed to large carriers' contract family plans. And for really incessant talkers, Virgin's $80 prepaid unlimited plan will save them $240 a year compared with unlimited contract plans from the major carriers.

"On a prepaid account, you can budget," said Sam Simon, chairman and founder of the Telecommunications Research and Action Center. "With postpaid, you're stuck with that monthly bill no matter what."

Fees can still trap the unsuspecting prepaid user. Some plans charge a daily user fee whenever the phone is used. Others may deduct text messaging and Web access from the minutes.

Focazio admits to missing some smartphone features after going with a bare-bones TracFone that cost him $29.95 at Wal-Mart and runs 10 cents a minute to use, with no additional fees. But he's a big believer in prepaid's bottom line, so much so that his wife and 9-year-old also now have basic TracFone models.

"You have to kind of let go of some of your ego" with the switch to a plainer phone, he said. If you can do that, Focazio said, "there's a lot of savings to be had."

There's also a sense of satisfaction that he's not being duped by a traditional plan that hit him up for countless extra costs.

"It's just stupid and wasteful to spend what you don't have to spend," he said. "We've really ratcheted up our personal savings."



Copyright 2009 The Associated Press.