Why don’t more Americans have prepaid phone plans? Study shows people clueless about termination penalties

The New Millenium Research Council has just published a report that shows 25 millon Americans could save money by moving from post-paid mobile phone plans to prepaid. So why are there so few pre-paid phone users in the US compared to other countries? The study lists 10 myths surrounding prepaid plans. The main reason people don’t move to prepaid is that they do not know when the early termination penalty expires. In fact a number of people think there’s a permanent termination penalty. People believe they can never get out of their contracts. Others think that the only people who should be using prepaid plans are those who rarely use their cell phones.

79 percent of Americans have mobile phones. Only 16% of them have prepaid plans compared to almost 50% in Europe. If the 25 million Americans who should be using prepaid actually do so, the percentage of Americans on prepaid plans comes closer to those in other developed countries.

I was on the conference call today when NMRC presented this report. It’s interesting and worth reading. Part of the Q&A:

A reporter asked why prepaid use in the US is so low. One of the researchers replied: “lack of general awareness among Americans of the cost savings and benefit of prepaid use.” I think this answer is incomplete.

Here’s what I think: US cell phone carriers sell plans according to buckets of minutes (you get 100 minutes per month and so on). In Europe, you buy packages (30 EUR per month) but you are being charged for each minute you call, some minutes are charged more than others, so you see very clearly how much you are paying by the minute and you easily exceed that 30 EUR “budget”. It’s also easy to exceed the 30 EUR per month if you call to other European countries, send text messages abroad. The US is a huge country so if you call NY, you don’t get roaming charges. If you are however in Amsterdam and you call Brussels which is three hours away by train, your phone bill explodes.


Prepaid phones in the US: Myths, Lack of Consumer Knowledge Blocking Wider Use

I posted this question “Why Don’t Americans Use Prepaid Plans” on Linked IN and got many answers. Here are some of the best ones:

(1) From Igor Matlin:

American consumers are used to buying handsets from carriers at subsidized prices, and the only way to get newer, “hot” phones is by signing post-paid contracts (regardless of what the report says about it being a “myth”). Handsets bought from one carrier usually cannot be used with another carrier even after the contract is up.

(2) From Max Harris:

  • “buckets of minutes” are how cell phones were first sold. First entrant has to be knocked off.
  • A lot of the Euro style plans have extra fees in the US. For instance, the $20 TopUp with Virgin is essentially a fee for keeping your number. I think BoostMobile has about 8 million fees that make it pricier than an actual contract.
  • Criminal enterprise. In the US, most of the phones for prepay are disposable cell phones. Crappy units that criminals love. It’s a whole new world of small time criminal enterprise these things and I think a lot of places you’d go to get prepay tend towards low scale income where small time criminals hang out: downtown drug stores and convenience stores.
  • Lack of great offers from big companies: I think T-Mobile is the only major carrier to offer prepay. While Virgin is a big brand that England may love, it’s new to the US.

(3) From Patrick D.:

  • This is a broad question with many answers. Max Harris made some good points. This issue goes back historically (80’s/90’s) when fixed line “pre-paids” were huge in Europe for basic voice services, local, LD or IDD. as evidenced by scratch-off card litter surrounding public phone banks. But in the USA, scratch-offs were not popular due to AT&T/RBOCs control.
  • Also, credit approval for post-paid in the USA had been much easier and lenient than in Euro or Asia. But that has changed now.
  • Finally, I think the number one reason is that the USA was late in adopting GSM SIM based service as well as the carriers lock the phones that they sell and thus even if you may be using a GSM/SIM service, you cant just go out an buy a Prepaid SIM unless you get an unlocked phone somehow. (This issue again, is a legacy from the CDMA dominance in the USA).

Read all of the answers on Linked In:



  1. I have a T-Mobile prepaid plan in the US. I don’t make a lot of phone calls because I use Skype as much as possible.