T-Mobile's Contract-Free Plan Explained
PHOTO: T-Mobiles Simple Choice plans dont require customers to sign a two-year contract.

T-Mobile, the fourth largest U.S. cellular carrier, has announced sweeping changes to its phone plans.

"Customers love smartphones, everyone hates contracts," John Legere, president and CEO of T-Mobile USA, said on stage Tuesday at the company's Uncarrier event. And with that the company killed the idea of two-year contracts.

That might sound awesome and fairly simple, but it can get a bit complicated when you start digging into the details, especially for those of us who have gotten so used to the two-year contract system. It's okay though; we're here to help you through.

Wait, back up. Remind me how cell phone plans work right now? With most carriers in the U.S. – Verizon, AT&T, Sprint – you can buy a smartphone like the iPhone 5 for $199, but to get that price you have to sign a two-year contract. That means you promise to pay that carrier for cellular service every month for the next two years of your life. That cellular service includes everything from text messages to data you use to surf the web and voice minutes.

For all that, the carrier drops the price on the phone. Take the iPhone: You pay $199 but it really costs around $649 without a contract. But remember when you buy that cheaper phone you agree to use that carrier for the next two years and pay them every month for service.

Okay, so what is different here? T-Mobile says those contracts are "bulls**t." No, really that's what the CEO said. The company now no longer requires customers to sign a contract for service. That's right, no annual contract to sign -- you pay month-to-month for your cellular bill and can back out at anytime. T-Mobile is calling it the Simple Choice Plan.

How does the plan work? Like any cellular plan there are different tiers. The Simple Choice plan starts at $50 a month for unlimited voice and text messaging and 500MB of data for web browsing, etc. You can up that data package to 2GB a month for $10. You can get unlimited data for $20 more. T-Mobile and Sprint are the only carriers to still offer unlimited data; Verizon and AT&T cut the option last year.

RELATED: T-Mobile Adds iPhone, Announces Contract-Less Data Plan

How does that compare to Verizon, AT&T or Sprint? This is where it can get very, very complicated. Verizon and AT&T offer shared data plans where you share buckets of data across different phones in your family; they may work out to be more affordable. For this, let's compare the individual iPhone monthly charges at AT&T, Sprint, T-Mobile and Verizon.

Verizon: $110 a month for unlimited talk, text and 4GB of data AT&T: $110 a month for unlimited talk and text and 4GB of data Sprint: $110 a month for unlimited talk, text and data T-Mobile: $80 a month for unlimited voice, text and data

You can see that T-Mobile offers the better deal, especially for those individual contracts. But there's another charge to consider on that monthly bill, and that's the price for the phone.

Yeah! What about the phone? Do I have to pay $600 for a phone up front? This is the part that's very different. T-Mobile will offer phones at an even lower price up front, but you will pay off that phone over time with interest-free monthly installments.

Let's take that iPhone 5 again. The iPhone 5 will cost $99.99 on the day you buy it, but you will then pay $20 every month for the next 24 months, which comes out to $480. See, over the two-year period you pay for the price of the phone. T-Mobile will offer the same type of deal on other smartphones, including the BlackBerry Z10 and the HTC One. There is also the option to just pay for the phone all at once up front.

T-Mobile says that customers can upgrade their devices at anytime though.

When does this all start? Right now. T-Mobile is already offering the plans now on its website and in its stores. The iPhone 5 will be available on April 12.

What about current T-Mobile customers? This is bound to make some mad, but T-Mobile customers with an existing two-year contract are only eligible once their two year contract is up. T-Mobile also says they will keep around some of the contract pricing in select stores.

Oh, and what's up with T-Mobile's LTE coverage? This all seems useless if they are still going to have slower phones. Good point! T-Mobile is finally starting to roll out its LTE service. It will start in seven major markets, including Baltimore, Houston, Kansas City, Las Vegas, Phoenix, San Jose and Washington, DC. It promises a bigger expansion soon with the goal of hitting 200 million Americans by the end of 2013. It will also start to sell LTE capable devices, starting with the BlackBerry Z10, which is on sale now.

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