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New cell phone upgrade offers can be costly

This post is apapted from one that appeared in the San Jose Mercury New

by Larry Magid

AT&T, T-Mobile and Verizon have recently announced plans that let people upgrade their phones more often. But before you get too excited, you need to do the math.

T-Mobile started it all in March by eliminating the dreaded two-year contract and allowing people to finance their phones, interest-free over a 24-month period. And recently, the No. 4 carrier sweetened the deal by announcing a “Jump” program that allows customers to upgrade their phones up to twice every 12 months. For years, the standard industry practice has been to lock you into a two-year contract and make you wait about that long before offering you a subsidized upgrade in exchange for a two-year renewal. But things are changing. Sort of.

The new plans makes it possible to get a new phone sooner — as soon as six months with T-Mobile and Verizon and a year with AT&T — and you might not have to sign a two-year service agreement. But you’re still on the hook for monthly payments that could wind up costing you as much as or more than you’re paying now.

Phones can cost > 3x more than subsized ones

Under the traditional plans, carriers will sell you a Samsung Galaxy S4 for $200 with a two-year contract. T-Mobile charges $630 for that phone with no subsidy, but you don’t have to pay it all at once. There is a $150 down payment plus a $10 charge for the SIM card when you pick up your new phone. You then pay $20 a month for 24 months for a total cost of $640 plus tax.

The good news is that you don’t have to sign a two-year contract. The bad news is you are on the hook for the entire $640 over that two-year period. You can change carriers, but you still have pay for the phone.

With the Jump program, T-Mobile allows you to upgrade the phone  after only six months. If you decide you want the latest and greatest model, you return your phone, pay the down payment on the new one and the clock starts all over again. You don’t have to pay the remaining balance on your old phone, but you now have a new two-year payment plan on the new one. You can do with twice within a 12-month period such as, for example, at month six and again at month eight.

The latest phones but perceptual payments

You can do this every six months, which means you’ll have the latest phone. But that also means you’ll have a perpetual payment of $20 a month, or whatever your new phone costs divided by 24 monthly payments. Oh, and there’s a $10-a-month fee for participating in this program, which includes loss and damage insurance. So you’ll really be paying $30 a month for that Galaxy S4.

AT&T countered with a somewhat similar deal of its own. It also will charge you the full price of the phone, but will let you finance it over a 20 month period, and there’s no down payment. If you decide to trade the phone in after a year, you start a new 20-month payment contract. And if you quit your AT&T service, the remaining balance is due immediately — which seems a bit like those dreaded early termination fees.

Verizon came back two days later with its new “Edge” plan that lets you get a new phone after six months but only after you’ve paid for at least half the unsubsidized cost of your old phone.

It’s like renting

AT&T said a Galaxy S4 (which retails for $595) would cost $32 a month in addition to the wireless service plan. That means you’ll pay a total of $640 for that phone if you keep it the entire 20 months. And that’s on top of whatever you’re paying for service, which can easily be between $100 and $150 a month depending on the plan.

But if you take advantage of the annual trade-in plan, what will really happen is that you’ll pay $384 a year to — essentially — rent your phone. That’s because when you upgrade to the new phone, you have to give your old one back to AT&T so they can resell it as a refurbished phone — most likely at a profit. The dollar amounts are slightly different, but the same concept applies with T-Mobile’s six month plan.

Sell your old phone

In the old model of paying a subsidized price, you actually get to keep your phone, which means you can give it to someone or sell it. When I upgraded to the iPhone 5, I sold my year-old iPhone 4S for $235 — $35 more than I paid for it. And I took advantage of a special offer to upgrade for far less than the $650 retail price of the iPhone 5.