How much does that free phone from your mobile carrier really cost?

If that smartphone offer sounds too good to be true, it might be - or it might not. How do you tell? Watch out for these seven gotchas that can drive your costs way up.
Written by Ed Bott, Senior Contributing Editor
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Your mobile carrier just sent you a tempting offer: A brand-new smartphone, absolutely free! And you can upgrade to the phone of your dreams for a low, low monthly payment.

I regret to inform you that you did not win the lottery, and your mobile carrier is not doing this out of the goodness of its giant corporate heart. This is a business deal, and you can bet that somewhere on the top floor of that carrier's headquarters there's a spreadsheet that shows exactly how much profit they stand to make off you.

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Still, sometimes that "free" phone really is an absolute screaming deal and you'd be crazy not to say yes. But other times you can do the math and find an alternative option that makes more economic sense. 

How do you tell the difference?

How free and low-cost phone offers work

The deals we're discussing here are unique to the United States, and specifically to the three big carriers that dominate the US mobile market. When you agree to accept your new phone from the carrier, the price you pay typically includes some combination of a down payment, a trade-in allowance for your current phone, and a series of credits that will be applied to your monthly bill. You agree to finance the phone at 0% interest, typically over a period of 24 to 36 months, and the credits offset all or part of the equipment charge for that same period.

If you trade your phone for a newer model or switch carriers before the promo period is up, you forgo any remaining credits and you're required to pay off the balance out of pocket.

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You might be offered a higher-than-expected trade-in value for your current phone, again offered as a series of monthly credits. To qualify for the deal, you might have to add a new line of service or change to a new plan, but you can occasionally find upgrade deals for your current device. And, of course, these deals are only for "well-qualified" customers. If you have so-so credit scores, you might not be able to take advantage of the deal.

In my experience, carriers go out of their way to make these deals complicated, and you need to look carefully to see if there are any hidden gotchas. Here are seven questions to ask up front to make sure you don't encounter an unpleasant surprise later.

Do I need to add a line to qualify?

Many of these promos require you to add a new line of service or port in an existing number. That's fine if you're changing carriers. It's not a good option if you already have all the lines you need, because that new line is almost certainly going to cost you more than the credits you'll get to pay for the new phone.

Does my existing plan qualify?

The most attractive upgrade offers are typically only available if you sign up for one of the carrier's premium plans. If you're currently on a low-cost legacy plan from the same carrier or a competitor, be sure to find out how much your monthly payment for mobile service will increase. The difference might be enough to wipe out any savings from the promo credits.

Will my new phone be locked to this carrier?

The carrier is offering that phone at a discount because they want to lock you into a steady stream of monthly service fees. Typically, that means the phone is SIM-locked until it's fully paid off. Consequently, you can't use it with a prepaid SIM card on your overseas trip, nor can you add a second line from a different carrier, even if you have a dual-SIM device.

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How many months does the payment agreement last?

T-Mobile still offers 24-month payment plans, but rivals Verizon and AT&T now apply device credits over 36 months. If you're absolutely certain you'll keep your new phone for the full three years, that might be a good deal, but you'll pay dearly if you need to replace it before the agreement ends.

What happens if I want to pay off the device early?

At any time during the agreement, you can pay the remaining balance and ask for the device to be unlocked. If you remain with the same carrier on the same plan, the bill credits will continue for the remainder of your term, effectively reimbursing for the early payoff. But if you end your three-year agreement at the end of the second year to switch to a different plan or a different carrier, you'll lose the remaining credits.

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As an inducement for you to switch, some carriers will offer to reimburse you for your device payoff. Check the terms and conditions carefully before you accept that offer. If you decide to move to a new carrier, don't cancel your line at the old carrier until you've successfully ported your number over; if you do that move in the wrong order you risk losing your current phone number.   

Can I get a better deal on the phone somewhere else?

Even if your carrier seems to be offering a good deal, be sure to shop around. Apple occasionally offers meaningful discounts on its iPhones, and the price after a trade-in might be good enough to consider, especially when you factor in the savings you get from sticking with a lower-cost legacy plan. Among the top Android device makers, Samsung and Google regularly offer deep discounts that are worth checking out. And all of those device makers offer 0% financing options.

Can I get a better deal selling my phone instead of trading it in?

You can almost always get a better price by selling your old device on a third-party marketplace like Swappa or eBay. If you're patient and savvy enough to abide by the rules of that marketplace, you can typically get a serious premium over what you'll get as a trade-in.

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The exception to that rule is usually when a new smartphone model comes out; during those brief windows of upgrade opportunity, you might get offered higher-than-market-rate trade-in allowances to induce you to buy. Just be aware that the extra amount typically comes in the form of  -- you guessed it -- monthly bill credits, for a period of 24 to 36 months.

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