A constant source of irritation for cell phone customers is the two-year contract, and a hefty early termination fee if you break it.

So perhaps it's not surprising that a new survey of cell phone customers suggests one in five consumers with contract-based service - an estimated 24.6 million American adults - is likely to switch in early 2011 to less expensive unlimited prepaid wireless service with no early-cancellation penalty.  

Nearly one in 10 additional contract-based cell phone users said they would consider switching if they were not currently subject to an early-cancellation penalty, according to the first annual "Net10 Prepaid Wireless Consumer Trends National Poll" conducted by Infogroup/ORC for the independent New Millennium Research Council (NMRC), a policy and market research organization.

In March 2009, NMRC forecast an imminent shift by cell phone consumers from more expensive contract-based cell phone service with often hefty cancellation penalties to less expensive no-contract prepaid service.   In March of this year, NMRC reported that - for the first quarter ever - the number of new prepaid wireless phone customers in U.S. eclipsed the number of new contract-based phone customers during the final three months of 2009.

Growing interest

The survey found that overall, roughly half (47 percent) of U.S. cell phone users with contract-based service - an estimated 57.8 million consumers - are "very likely" (23 percent) or "somewhat likely" (24 percent) to switch to "a no-contract or prepaid phone" when "your cell phone early-cancellation penalty period ends and you can switch at no cost."  

Among U.S. cell phone consumers with contract-based service who say they are unlikely to switch to no-contract/prepaid service in the next six months well over half (56 percent) are "very or somewhat open to switching to a no-contract or prepaid cell plan at some point in the future, but aren't planning to do so now."  Fewer than two in five contract-based phone users (38 percent) indicated they "don't see yourself ever switching to a no-contract or prepaid cell phone."

The top four reasons cited for U.S. consumers to switch to a no-contract/prepaid cell phone (including "major" or "somewhat" of an impact): 68 percent "needed or wanted to cut cell phone bill costs"; 58 percent were "paying too much for a Smartphone with features you didn't need or use"; 49 percent were "unhappy with (an) early-cancellation penalty for contract-based phone service"; and 48 percent cited the "recent availability of unlimited talk, text, Web and email access on no-contract basis for about $50 a month."

"With millions of recession-weary consumers looking to trim even more fat from their household budgets, 2011 is shaping up to be the Year of the Prepaid Cell Phone Consumer,” said Sam Simon, senior fellow, New Millennium Research Council. "Even without the need to pinch pennies during the current economic downturn, consumers are clearly fed up with the high prices of contract-based cell phone service and the gouging that goes on with early-termination fees.   We were the first to forecast a big shift to no-contract/prepaid cell phone service by U.S. consumers, but we may have actually underestimated just how quickly this trend would catch on"  

Should you switch?

Prepaid plans — also called pay-as-you-go plans — allow you to purchase minutes in advance, as you need them. There is no contract, credit check or deposit, and most plans won't make you pay an activation fee.

Prepaid wireless isn't for everyone, especially if you're a heavy wireless user or want certain types of phones. However, you might consider going prepaid if:

  • You want to budget your expenses

  • You or your teen need a limited-use phone 

  • You need a phone only for emergencies 

  • You have bad credit 

  • You want to test-drive the carrier before signing a contracted plan.

Just because you don't sign a contract doesn't mean that choosing service can't be confusing. You still have to do your homework, and do it well.

What to consider

There is nothing wrong with shopping based on the type of phone or the per-minute rate, but none of that matters if the service doesn't work in your area. Start with checking the coverage map, but understand that it's only a "general information” guide and nowhere near perfect.

Just as with a postpaid plan, a cell phone is basically a small radio. Weather, terrain, and buildings can play havoc with the quality of service. A phone can work fine on one block but not the next.

Until you know the service works well where you need it, you're typically better off by starting with the minimum amount of minutes needed to get the service off the ground.

Options for prepaid service have increased in recent years. Discount providers like Tracphone pioneered the concept, but left many customers dissatisfied. Recently major carriers like Verizon and Virgin Mobile have also begun offering a pay-as-you-go alternative.

Earlier this year Wal-Mart began offering a "post-paid" cell phone market with a $45-per-month, unlimited talk/texting plan that it says could save a family of three up to $1,200 per year.