How Contract Phone Plans End Up Costing Way More Than You Expect

We're not big fans of 24-month phone contracts here at Lifehacker, and the evidence for how they're bad value keeps piling up. An analysis of phone bills by Macquarie University suggests that people on a monthly plan will typically end up paying $20 or more extra each month.

Image courtesy of Shutterstock

The research is part of an ongoing series sponsored by prepaid provider Amaysim, which we've reported on a number of times. For this stage of the research, Dr David Gray and his time analysed 201 bills, taken from a demographically representative group of Australians.

"The average bill shock was $28 a month in the sample period," Gray told Lifehacker. Unexpected data charges were the most common issue, affecting 43 per cent of bills with an average extra total of $22.18. While overspending on calls was less common, affecting just 24 per cent of the group, the average value for excess calls was higher, coming in at $43.12.

Adding insult to injury, many people manage to overspend on data while not using their full paid-for value for calls and texts. "While 40 per cent were subject to bill shock, there was a significant percentage of people underutilising their included value." The average included value across all the bills analysed was $547, but typically customers only used $262 worth of calling credit. "The average headline cap rate is $53, but you wind up with an average bill of $73. That's a big jump. Once you've used your inclusions, then it skyrockets in terms of the costs."

Aside from emphasising how most people don't realise what they're spending on their phone, Gray said the research emphasised that bills are too confusing for most people to analyse. "We went through 200+ bills and it was a very frustrating process. It was hard enough for us to analyse, let alone the poor consumer. Bills should be simple to read. They should be comparable. You should be able to do it without needing a PhD. All of the potential costs should be identifiable. It's not rocket science."

While the gradual introduction of the Telecommunications Consumer Protections Code brings greater transparency to how plans are marketed, it has less impact on how billing information is presented. For now, our advice remains the same: avoid signing up for a contract plan if you can.


Comments

    I go one 24 month contracts so I can get the subsidized handsets, at the moment I pay $59 per month, I got my iPhone for $0, get 2GB of data, $650 worth of calls, free text, free calls to other numbers on my contract. I don't make anywhere near $650 worth of calls, or use 2GB of cellular data, but if I went down to a plan closer to what I use, I would be paying more all up with the handset repayment. 24 month contracts may not be for everyone, but they are good value for some people. I have been on contracts since I was just out of school, it made it really easy to budget my finances (a must when living with very small budgets), and if you are the tiniest bit smart, you can avoid bill shock by a) checking your current usage, b) not using 'premium numbers' c) use the tech/plan to your advantage. Use Skype over wifi for free calls to particular people, text more than call, don't download apps over 3G/4G wait till you are on wifi etc, its not hard to do.
    If people don't understand how to read their bills, they should just go into the carriers store, sit down with them and get them to walk them through it, I don't understand why people complain about not understanding things when they don't try and learn.

      You're not too smart if you're calling it free text/calls. It's included in the price. But you make some valid points, you can break even with a plan.

        I think what he means to say is unlimited text and calls, you are right it is included in the price.

      This post here shows exactly why the consumer protection code is needed.

      Anyone who thinks that they pay $59 and get "$650 worth of calls" is woefully deluded.

      If you pay $59, then, at most, you get $59 worth of calls, data and sms.

      The dishonest marketing that has been going on for years, including absurd claims of included value, and the misuse of terms such as "cap" can't end soon enough.

        Well it all depends on the carrier and what the contract says.

        They could very well give you what they call "$650 worth of calls". If the contract says that you get charged, say, $1 a minute, then that's 650 minutes worth of calls. If it's 50 cents a minute, it's double that (1300 minutes). If it's $2 a minute, it's half that (325 minutes).

        You need to make sure you actually read the contract but the problem is most people don't. They honestly aren't that hard to understand if you read them but people don't and then complain when they get stung. And honestly there's really no excuse for getting stung these days with all of the tools you have available on smartphones to help you stay on top of that stuff.

        I almost always go onto contracts because it ends up cheaper in the long run than buying the phone outright. And I've never been stung by unexpected charges on my bills.

          The $650 figure is deliberately misleading because they inflate the costs of their services to make it appear like you are getting that amount (as your example points out).

          You might as well call it 650 points of value because the amount bears no resemblance to any real world currency.

          If someone is paying $59 a month, they are getting $59 worth of service.

            The $650 for $59 or whatever is fairly academic if you are under the cap but if due to a change of life circumstances (family illness? unemployment?) your calling needs step up to the extent you blow through the "cap" you might end up paying a considerable over use charge. With this in mind I have generally taken "a cap up" from what I really need in-order to be safe - and gift free money to the telco.
            I agree that the sooner this goes away the better but where will they then move the cost to? Nothing is free.

      Precisely. There are also ways that you can monitor your calls, sms and data usage. My telco also sends me a message when I'm close to exceeding my cap. Its not that hard to avoid bill shock if you're smart about it.

        +1

        The issue seems to be that phones became smarter than their users several years ago.

        I don't even consider that you have to be 'smart' about it' to manage a voice/data plan - there are variations in call charges but they're not 'rocket surgery' and there's plenty of apps which'll monitor it for you.
        The worst-case scenario may be that you get surprised on your first month but continuing your usage pattern and incurrring additional charges beyond that must surely be deliberate, careless, naive or incompetent.

        This while scenario is depressing - the high rate of users incapable at managing their own affairs is stunning.

    Why does this article not say what the cost would have been for the same calling pattern on a prepaid sim? Its fine to talk about bill shock increasing your bill by $20, but would the same calls and data usage cost less on prepaid?

      It'd be hard to determine which pre-paid to compare it to I guess. As the research was done by AmaySIM I'll compare it to one of their plans... I use AmaySIM Unlmited and pay $39.90 a month for EVERYTHING. Unlimited calls to any Aussie phone (landline/mobile), unlimited SMS/MMS, unlimited social network data use plus an additional 4GB data per month (which I didn't even excced when my house was offline for over a week and I had my laptops tethered over it's connection...). If you compare this with the first post on here from the guy who pays $59 per month you'd actually be able to buy a handset for about $475 and use this deal to be on the same 'price' per month but have an incredible amount of extra phone use (unlimited, in fact) available to you.

    I don't really understand why you guys are against contracts.

    Let's say I want to get the new iPhone. I can get it from, say, Optus for $66/month over 2 years. That includes a decent 1.5GB of data per month and $650 worth of calls (whatever that means). Over the two years, total cost is $1,584.

    Alternatively, I could buy the phone outright from apple for $800. Assuming I'm prepared to pay the same amount as the plan, that leaves $784 for me to spend on my calls&data over the next two years. i.e. $32 per month. Looking at the major providers (and amaysim for that matter), I can't see where I can get as much data and calls for less than $32 per month.

    Then theres the fact that it's obviously easier and "cheaper" (time value of money), to pay an amount slowly over two years than in a lump sum up front.

    Anyway, just my thoughts, interested to hear whether others disagree.

      Absolutely the same reasoning I signed up for a plan for a Galaxy s3. For my needs I'd be looking around $50 a month anyway, so I may as well pay the extra $10 a month for Telstra coverage+the phone.

      You can get 2Gb of data, $700 "worth of calls" and free SMS for $17 with Vaya on their large flexiplan. Month-to-month, no lock in.

        on who's network does this run ?

          Optus

            +1 for Vaya, i just left Optus on a $60 a month business plan to go on Vaya's $17 plan. I bought a iPhone outright and am getting heaps more value on a month to month. Should have done it ages ago.

      I pay $18 a month with TPG for about $350 TPG network and $350 any network plus 1 or 2GB of data. I bought a Samsung Galaxy S1 exactly 2 years ago for about $600. $18 TPG plan x 24 months is 432. I've spent $1000-$1100 over the last 2 years on an outright phone and a no-contract plan. Saving $400-500 on if I had taken up the plan with a provider that gives you the handset too.

      If I double the plan to $35 I get more than double the credit/data, but I've only ever reached my cap once or twice and I text quite a lot. For some contacts I use Whatsapp so I use data instead of credit, to balance it out.

      I've always bought my phones outright and then done prepaid Optus or TPG No contract. Been "off" a contract with TPG now for 3 years and I have no complaints. I get messages from them saying I'm halfway through my text/calls credit and then messages when I'm like $50 from the cap.

      Signal is fine, internet is fast, customer service is helpful and friendly. I don't know why people aren't signing up with the smaller providers. These companies are fine. There is a pretty high standard these days. With so much competition and reel-in-deals to take customers away from their current providers, telco's need to be on their game. If they drop the ball then they will lose a lot of people.

      you didn't look very hard...TPG $18 (or $15 if you have another service), 1.5GB $550 calls, free TPG to TPG

      There are plenty of optus resellers that provide that sort of value for around $20/mo
      The trick is to find one that doesn't have subsidised handset plans, those guys don't want to sell a sim only plan at all so they purposefully price them slightly above the break-even point for this sort of behaviour.

      I'm already an iinet internet customer so bought my iphone outright and use their $20 plan, i was using the $10 plan for about 6 months but kept going over by about $10 worth of data.
      I'm planning on selling my current iphone as soon as they have nano sims and upgrading my handset while it still has decent resale value.

      It's a valid point and depending on your view you're either getting a subsidized handset 'for your loyalty' or to 'lock you in'. Some view it one way, some another. Going back to comparing with pre-paid Amaysim if you could keep within your contractusage then you're saving $8 per month, if as this report says 'Mr. Average' normally goes about $20 over then you're obviously worse off by $12. If you think you're going to be in the 'bad' half of people who go over by this amount or more each month then AmaySIM would give you significant savings (as it wouldn't matter how much you go over the call minutes as their plan is unlimited calls/SMS/MMS/voicemail etc).

      Of course a lot of people don't have the money to buy a phone upfront and so a contract is of great use to them.

    Dr David Gray and his time Perhaps "team" not "time"?

    Anyway, the independence of the study is questionable as it was sponsored by a company providing an alternative to 24 month mobile phone plans. It was sensible though, that LH declared interests at the start of the article.

    Despite the concerns I have about the study I agree that mobile bills are "frustrating". My god, they are utterly incomprehensible. The notion of "included calls" is complete nonsense. These are not tradeable commodities. These valuings are internal to each company and do not have meaning out in the marketplace. The companies might as well say "included is one million, billion, trillion dollars worth of calls". You can't go and take that and cash it in for anything with another company.

    The Federal Government has recognised the complexity of incomparable contracts involving credit and devised a mandatory comparison rate which must be displayed in ads for those contracts. Why can't a similar approach be extended to the mobile phone contract arena? Admittedly, these contracts are not credit contracts but arguments against doing such a thing eventually evaporate because for those people experiencing bill shock they do ultimately pay interest for their bills via their credit cards. Further, it is also possible for jurisdictions to mandate a standardised billing format.

    In the end, I think there are many options available to bring about comprehensibility and competitiveness in the mobile phone market and ever moreso, to empower the consumer to make informed choices. The fact that we haven't pursued these options in Australia reflects poorly on government's willingness to push for the community.

      The Federal Government has recognised the complexity of incomparable contracts involving credit and devised a mandatory comparison rate which must be displayed in ads for those contracts.

      Unfortunately, the quoted price for a 2-minute call is still measured in the carrier's fake currency, which they use for what you correctly say might as well be "one million, billion, trillion dollars worth of calls." I have no idea if the government intends to force them to change this to real money.

        They should outlaw flagfall and force them to quote their contracts in 'minutes of calls'.

    All this fizzle is a waste of breath. We should be lobbying to abolish 'contracts' — which by any amount of rhetoric fail the legal definition — and pursue pay-for-use, i.e., only pay for the calls and data used rather than a blanket monthly fee with entrapment as an agenda.

    I wrote an article at http://wp.me/p1XP0z-kY about using DataWiz, for the iPhone that tracks my 3G data usage. I use it over a month or two and work out the best data plan to go on, based on my pattern of consumption. But what I was going to say as well was, carriers fail to tell people what the minimum data increment charged is. That is, vodafone charge 50kb, regardless of whether you use 1 or 50 kb at a session. Telstra are better at 1kb, but Optus i believe is horrible, at up to 100-200kb.

    Living on a small budget... With a 60/month phone contact. When I hear of people who run out of cash and post about their poverty on Facebook via their new iPhone I just laugh.

    All of my contracts expire over the next 6 weeks ($99cap/mth for unlimited calls/2GB data + $39.95/mth (8GB) for mobile broadband with Optus. Add the $180/12GB/12ths prepaid with Telstra for the ipad and I think I have been paying well over the odds for usage, particularly data where the mobile+mobile broadband combined rarely exceed 2GB/mth & calls generally well under that.

    Have decided that, due to network issues I am ditching Optus and moving to Telstra's $80 cap with unlimited evening/weekend calling (as that's when I make the most calls). Will also pick up a Telstra 4G prepaid using the $180/12GB/12mths cap and an Amaysim/Optus prepaid for the ipad. Hope that lowers my costs and improves network coverage substantially!

      Why on earth would you be paying for all those contracts - why not just get one 'big' or 'unlimited' cap for you mobile and hotspot your other devices to it

        Agreed - everything gets tethered through my phone when I'm not on my home broadband. In fact when my broadband was offline (between packages) last month I changed my hotspot to have the same SSID and password as main router and had my whole house connect through it for a week or so, no problems whatsoever.

    12 month contract
    ~$70 plan incl. insurance - with the inclusions I've never come close to reaching the cap.
    Lumia 800 (new release at the)
    Total cost $840 over 12 months for the best WP7 phone at the time, insurance (which came in handy when I shattered the screen) and more calls/data/TXT than I can shake a stick at.

    The catch? Vodafone. Having said that, I have had no real coverage issues for normal telephony - it's just their data which is slow. So that sucks, but IIRC the handset would have cost ~$600+ outright, meaning I'd have to fit insurance and connection into $240 (or $20/month) to get an equivalent deal.

    Know what you're getting, make a rational choice based on your usage patterns, and you get a good deal. Fail to take into account the way you use your phone and you'll short-change yourself. This is the same with all things, isn't it? If the 800 was getting WP8 I'd totally go BYO handset and try out the smaller carriers.

      Yeah... if you don't mind Vodafone you could look into Red Bull Mobile (Vodafone reseller) and their $1 per day unlimited 'Access 365' plan. They give you an HTC Explorer for $1 when you sign up too so you could even sell this on to sweeten the deal. Might get $100 or so if you're lucky... $270 per year for an awesome amount of use!!

    Underutilisation isn't such a big deal as long as you're not paying that extra "bill shock" they are talking about. If you're simply underutilising then you're either on the wrong contract (your stupid fault) or you're on the contract you wanted for other reasons than simply the usage of one part of the contract and you're happy with the other parts of the contract.

    Another bill type I dislike is the electricity bill.. one of the most insanely difficult bills to understand, especially with the overlapping billing periods shown on the same bill.

    If you're on iOS, you should get an app called consume. It will not solve the problem outlined in the article, but it will at least allow you to monitor both call and data spend. There must be other similar monitoring apps for other platforms. My two cents.

    The article touches on an important point that no one's really commented on so far: the calls/data balance of nearly all contracts is totally out of step with modern (smart)phone usage. Perhaps it's more profitable to stay in the dark ages, but that's where the major telcos seem to be living.

    Once upon a time, back when I owned an Ericsson candy-bar phone, going "online" was so inconvenient and so limited that I rarely bothered. Which meant that a contract favouring calls and texts over data made perfect sense. You'd choose the plan according to your calling pattern, and the small amount of data included was usually plenty.

    Now we're using smartphones of one kind or another. And speaking from my own experience, my calling rate is very low. I make an average of one or perhaps two calls a day. My data usage, on the other hand is relatively high. I would typically use about 400MB of network data (with maybe a further 600MB of data via my home wifi, so not coming off my phone data plan). From the passing mention in the article, I suspect that's not atypical. And yet the plans continue to be structured in such a way that sufficient data comes only with an excessive, and usually unused, allowance of calls.

    Which is why I really wish that the telcos would craft caps or plans that accommodate the few calls/high data usage that's normal for those customers who see their smartphone as a mobile computer that also makes calls.

    Alternatively, perhaps even better, I'd like to see a kind of mix-and-match system where you pick a call plan from group A to J and a data plan from group 1 to 10, and the resulting combo is your personal contract, whether that's A10 for the antisocial data junkies or J1 for those who spend their lives on the blower.

    Last edited 28/11/12 12:17 am

    You're not paying $0 for your phone, though. You're paying $0 up front. Over your 2 year contract, your plan will cost at least $1416.

    The alternative is buying your phone outright and going with one of the many cheap MVNOs out there. Using the Optus reseller Vaya as an example: Their $11/month plan would suit your usage fine - it has "$500" of calls and 1.5gb of data. That's only $264 over 2 years.

    The most expensive smartphone on the market (excluding stupid gold plated editions, etc) is the 64gb iPhone 5, which goes for around the $1000 mark outright. Though on a $59 plan, you probably have something like a 16gb iPhone 4s, which is around $600 outright.

    You could save ~$550 over two years by buying your phone outright and switching to a cheaper provider ($600 phone + $264 plan = $864 vs $1416) So, essentially, on a $59 plan, you're paying about $1150 for your iPhone.

    And that doesn't even take into account the fact that you're not locked into a contract for 2 years and can switch providers and phones any time you want!

      Ugh. This was meant to be a reply to @Red Candle

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