Cell phone plans in the US are generally sold in one of two ways: either 'postpaid' or 'prepaid'. Postpaid plans are also known as contract plans, and the customer agrees (signs a contract) to pay for the service after it is used. A credit check or deposit is generally required since the customer is not paying for the service up front. With prepaid plans, the customer pays for the service before using it.
Rates & Fees
With contract (postpaid) plans, the customer agrees to pay a certain rate. The contract may also stipulate additional fees should the customer use more than a set number of resources such as minutes, texts, and data. Often these contracts include the cost of the phone itself, so that the customer pays for the phone a bit at a time over the course of the contract. Customers sometimes complain about "hidden" or "unexpected" fees with contract plans. While carriers may try to gloss over the existence of these fees when the customer signs up, technically they are part of the contract and to be expected, as are taxes and other government-imposed fees. (There are rare occasions where companies do add charges inappropriately.) Thus the payment due at the end of a month of service may be significantly higher than the "sticker price" while still being legal.
On the other hand, since the customer pays for prepaid service before using it, he or she is aware of the price at the outset and may feel more in control. If the customer wants to use more resources than are included in the plan, they have to buy extra minutes, texts, or data before using them, instead of paying for them after using them. On a prepaid plan, customers can be more in control of their spending, without having to watch their usage to avoid overage fees. Any taxes are paid for at the time of sale, so even if the amount due is more than the sticker price, the customer can still decide to not buy the product. Customers are also not subject to credit checks, since they are not making a promise to pay in the future. For these reasons, prepaid plans are often simpler to manage. In addition, they are often cheaper than postpaid plans.
While prepaid phone service may call up images of unsophisticated flip phones, in reality almost any phone can be used on a prepaid plan. The difference is how the phone is paid for. With a contract plan, one often pays for the device in installments as part of the monthly fee. This is part of why contracts often have a two-year term and a heavy early termination fee. With a prepaid plan, the customer pays for the phone up-front. This may mean spending hundreds on a new smartphone, or forty dollars on an inexpensive basic model. While this is a larger one-time cost, the monthly cost for the phone service is often significantly lower. In fact, a popular strategy is to take a used phone that no longer has service and putting it on a prepaid line. Getting started involves either activating the phone with the carrier, or purchasing a SIM card from the carrier and inserting it into the phone, depending on what type of network the carrier runs on.
While there are four major cell phone networks in the United States, there are many companies who sell service on these networks. Many of these companies, called Mobile Virtual Network Operators (MVNOs), offer plans on the big networks for less than the big name brands who own the networks. Learn more about how MVNOs work and what they mean for you as a customer.