T-Mobile Accused of False Advertising with 'No Contract' Plans

T-Mobile shook up the wireless carrier industry when it promised to move to a "no-contract" system for customers. But now labor and consumer advocacy group Change to Win has accused T-Mobile of locking customers into a different kind of two-year contract—and levying heavy fees on people who switch carriers before that two-year window is up.

Historically, the big four carriers all offered the same kind of basic cellphone plan: If customers agreed to sign a two-year service contract, they could get a huge discount on their phones—so a smartphone worth $650 might have only cost about $200 up front. The carriers made up the difference by charging higher monthly service fees and making it difficult (and costly) for customers to switch to another provider.

This old system was bad for consumers for a couple of reasons. First, people who kept their cellphones longer than two years continued to pay the higher monthly service fees, long after they had paid off the full cost of the phone. Second, people who wanted to switch carriers before their term was up had to pay "early termination fees" as high as $350.

T-Mobile offered a simple solution: Customers could pay separately for their cellphone service and their cellphone. That way, T-Mobile could offer much lower monthly service fees, and customers wouldn't be stuck in a two-year service contract.

The catch? T-Mobile also offers an "equipment installment plan," which lets customers pay for their phones in monthly installments. For example, you can either buy an iPhone for $650 outright, or pay $27.09 a month for 24 months.

When you sign up for an "equipment installment plan," you're signing a different kind of contract: one that governs how you'll pay for the device. Leave T-Mobile before you've paid off the full cost of the phone, and the carrier can send you a bill for the rest. Since many smartphones exceed $600, customers who terminate their equipment installment plans can end up paying more than the traditional $350 early termination fee.

What's more, Change to Win claims that T-Mobile aggressively sends debt collectors after customers who have been billed. "The consumer complaints suggest that T-Mobile improperly sends bills to collections and engages in practices that make it difficult for customers to contest their debts," the group writes. "The company’s deceptive marketing of its 'no contract' service plans may exacerbate customers’ confusion and vulnerability to delinquency, which makes T-Mobile’s inadequate debt collection procedures and debt resolution process particularly troubling."

As a result, Change to Win has called on regulators to investigate T-Mobile for "deceptive marketing" and "abusive debt collection practices." USA Today reports that New York Attorney General Eric Schneiderman is investigating the complaints, and that Change to Win is sending a list of allegations to the Consumer Financial Protection Bureau.

Consumer advocacy group Public Citizen seconded the call to investigate T-Mobile. "This report should be a wake-up call to regulators and customers alike," Public Citizen's Susan Harley said in a statement. "It’s time to dig into these charges to make sure that T-Mobile’s more than 61 million cell customers are not being taken advantage of."

T-Mobile did not respond to Money's request for comment, but T-Mobile CEO John Legere made a comment in response to the USA Today story on Twitter, saying he stands by the carrier's "no annual contract" ads.

What you should know: When you buy an equipment installment plan, you're signing another contract, and you may not be able to leave T-Mobile early without paying a penalty. But T-Mobile does offer good deals on plans. Money named T-Mobile's Simple Choice Plan one of the Best Cellphone Plans of 2015. So if you want to try T-Mobile service, but you want the ability to switch carriers, consider buying the phone outright—it's expensive, but you'll own your device, and you'll be free to leave whenever you want.