The 411 on early-termination fees (FAQ)

Verizon Wireless has doubled its early-termination fees for smartphones, but what does it mean for the rest of the industry?

If you are considering buying a new BlackBerry, Android phone, or Netbook from Verizon Wireless, you better make sure you won't want to break your contract early, as the penalty for ditching your service before the end of the contract has just gotten a lot steeper.

But what does Verizon's move to increase early-termination fees mean for the rest of the wireless industry? That's a good question.

Verizon Wireless recently doubled its early-termination fee for what it calls 'advanced devices.' Verizon Wireless

Early-termination fees are not new to the wireless industry. For as long as wireless operators have been selling and subsidizing cell phones, they've required customers to sign contracts. And they've penalized them for canceling their contracts early.

The phone companies say they must charge a fee to recover the cost if a customer quits his or her service early. These fees have angered many customers. Several class action lawsuits have been filed against cell phone carriers and some customers have won. Congress and the Federal Communications Commission have challenged the industry on this practice .

While it's very unlikely these fees will ever go away, as of mid-2008, all four of the major wireless carriers in the U.S. have been prorating their early-termination fees , so that customers near their end of their contracts don't pay the same fee as those just starting their contracts.

But now Verizon Wireless has shocked consumers and the industry by doubling its early-termination fee . Verizon representatives say it only makes sense that Verizon would raise this fee since it is subsidizing far more of the cost of sophisticated devices, such as smartphones.

In an effort to help consumers better understand these changes and to understand how other national wireless operators stack up, CNET has put together this FAQ.

How much is Verizon's new early-termination fee?
The new fee has been increased to $350 from $175.

Does this fee apply to all Verizon phones?
No, it only applies to contracts associated with the purchase of what Verizon calls an advanced device, such as a smartphone or Netbook at a reduced price. This change only applies to new contracts that started on or after November 15. For customers who signed a contract before November 15, the old $175 early-termination fee applies when they choose to end their contract early. This means that new Droid customers who bought their phones the first weekend it launched will not be required to pay the $350 ETF if they terminate service early.

Verizon and the three other major phone companies have been prorating their early-termination fees. Will this fee be prorated?
Yes, Verizon will continue to prorate the early-termination fee over the life of the contract. The rate will decrease by $10 each month of the contract. Verizon's previous prorate rate was $5 per month.

What about for non-smartphones or feature phones that run on Verizon's network? What is the early-termination fee for those devices?
The fee for non-smartphones will remain the same, $175. And the rate will decline by $5 a month during the contract.

Why is Verizon changing its policy now? It seems like it is just being stingy.
The company says that the $175 early-termination fee was set long before people were walking around with expensive, sophisticated, mini-computers in their pockets. The new early-termination fee more fairly reflects higher costs associated with advanced devices due to their more complex chip sets, microprocessors, and licensed software that perform more functions than other phones, the company claims.

Is there any way to avoid an early-termination fee or contract?
Yes. First, early-termination fees only apply if you cancel your service before the contract ends. But you also don't need to sign a contract if you'd rather not. But without a contract, customers will pay full retail price for the devices.

Verizon says it offers the option to purchase all its phones with either a two-year contract, one-year contract, or month to month, which requires people to pay full retail price for the phone. For example, the new BlackBerry Storm 2 is $179 with a two-year contract. But the phone would cost $539 without a contract. The new Motorola Droid is $199 after a rebate with a two-year contract. And it is $559 without a contract at the full retail price.

Verizon also offers prepaid wireless phones and service, which allow customers to buy their phones and add minutes of use in advance.

What about other national wireless operators? Have any of them announced they are following Verizon's lead?
So far neither AT&T, nor Sprint Nextel, nor T-Mobile USA have said they plan to raise the early-termination fees on their smartphone devices. An AT&T spokesman said he couldn't speculate on what the company might do in the future, but for now, the company is sticking with its current fee.

T-Mobile USA's spokesman didn't elaborate, but simply said the company has no plans to raise its rate right now.

Sprint Nextel also said it wouldn't raise its early-termination fees, and it criticized Verizon for doing it.

"We have no intention of matching Verizon's new ETF," said Sprint spokesman John Taylor. "We think the decision to double the early-termination fee just on smartphones doesn't make much sense. Why is Verizon trying to disincentive people from buying smartphones? We want people buying smartphones and using more data."

How much do these other national wireless operators charge for their early-termination fees?
Sprint 's early-termination fee is $200. The company reduces that fee beginning in the fifth month of the contract. Then the fee goes down $10 a month until it reaches $50.

AT&T's early-termination fee is $175 and it decreases by $5 for each month of your contract.

T-Mobile USA's early-termination fee schedule is a little more complicated. As of June 28, customers with a one-year or two-year contract with T-Mobile will see their early-termination fee drop from $200 to $100 if they end their contract with 91 to 180 days remaining on their agreement. If they end a contract with fewer than 91 days left on it, they will pay a termination of fee of $50. For customers who terminate their service in the last 30 days of their contract they will either pay the $50 fee or their standard monthly charge, depending on which one is cheaper.

Do these other carriers offer no-contract options?
Sprint allows some of its phones to be purchased for full retail price without a contract. However, the Palm Pre, which went on sale in June, requires a two-year data plan.

Sprint's prepaid brands Boost Mobile and Virgin Mobile USA also offer customers prepaid options that don't require a contract. And phones are purchased at full retail prices.

AT&T allows some phones to be purchased at full price without a contract, but phones such as the Apple iPhone must be purchased with a two-year contract and a $30 a month data plan. AT&T also offers prepaid phones.

T-Mobile USA also offers customers who don't want a contract different options, including T-Mobile Prepaid phones and plans, FlexPay, and month-to-month services including its new Even More plans.

Its Even More Plus plan allows customers to purchase any phone in T-Mobile's device lineup and sign up for a month-to-month rate plan without signing a contract. Customers pay full retail price for the phones, but have the option to purchase their phones using an Equipment Installment Plan over time until the phone is paid off.

For example, a customer purchasing the Google Android myTouch smartphone would pay $150 for the phone with a two-year contract. But with the Even More Plus plan, the customer would pay $400 for the phone with no contract. If the customer wanted to use the Equipment Installment Plan, he or she would pay $20 a month for the phone over 20 months.

 

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