Does a cellphone contract make financial sense?

Published on 25th November, 2022 at 01:54 pm

The temptation to upgrade your cellphone can be a strong one, especially when you see all the nifty things handsets can do these days. But does it make sense financially? We’ve weighed up the pros and cons for you.

Reading time: 3 minutes

In this article you’ll learn:

• The pros and cons of taking out a new cellphone contract.
• What to consider before signing a cellphone contract.
• How a cellphone contract can affect your budget and credit score.

With technology constantly improving, it can feel as though you have to upgrade your smartphone regularly to stay on top of things. Yet, who can afford to buy a new phone every year? That’s where a cell phone contract can come in handy. But while having the latest device in your hands is fun, it does come with financial implications that you have to think about before signing on the dotted line.

Contract vs. prepaid

Both prepaid and contract phones have pros and cons. Prepaid has less paperwork, but a contract could work out more convenient on your wallet initially, since you don’t have to buy a phone outright upfront. Then there are the actual data and airtime costs to consider. “Go through your bank statements to check your data-purchasing habits,” suggests financial coach and founder of financial education initiative Financial Bunny Nicolette Mashile. “If you’re consistently buying small amounts of data or airtime every few days, it’s costing you in terms of fees and time.” Switching to a contract instead of pay-as-you-go could help you curb these extra costs.

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Consider this first before signing a phone contract

“Any financial decision needs to fit in with your current and future lifestyle and budget,” says Mashile. “Is it something you can afford now and for the duration of the contract in the future?” Taking out a contract is a service agreement that you will need to honour, often for 24 months at a time.

What additional costs should you be aware of?

“When you are buying a phone, you’re gaining an asset, so how are you going to protect this asset from any potential financial loss?” Mashile suggests you ask yourself. You may need to factor in the cost of insurance and repairs, too.

“Your contract could give you a certain amount of minutes and data, but will it be adequate for your needs, considering the price you pay?” Mashile poses. If you have to top up your data every month, it might not be the best deal for you. Do the calculations to see if buying prepaid actually does cost more or less than what you would end up paying on contract.

Then, finally, there is the reality of interest charged. To enjoy the convenience of access to a snazzy new handset upfront, your provider charges you interest as part of your instalments, which at the end of your contract period will mean you are paying more than you would have if you’d gone the prepaid route. This is also something to think about: how urgent is your need for a new device, and do you have the option to save up instead?

How a cellphone contract can impact your credit score

Mashile says your phone contract will show up as a line of credit on your credit profile – and missing a payment could impact your credit score. But making sure you pay each instalment on time every time will also help you build a good credit rating. “A phone contract shows a credit behaviour on your part in terms of you paying for this obligation based on an agreement, so it’s important if you want to build your credit score,” she says.

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