Prepaid vs Contract Electricity

Residents of Texas have a variety of options available to them on the energy market, providing them the freedom to pick an electricity plan that best meets their needs. One decision most bill-payers will have to make is whether to sign up for a prepaid or a postpaid energy plan.

Prepaid Electric Plans

On a prepaid plan, you can pay a fixed cost at the beginning of each month in exchange for a set amount of electricity. You can replenish your balance as it's depleted.

Contract Energy Plans

On a postpaid (contract) plan, you pay after the fact for the electricity you consumed the previous month.

Think of it like paying a set amount at the gas station before you pump, as opposed to filling your gas tank and paying the balance afterward. Read on to learn more about the pros and cons of having a prepaid versus a contract energy plan and get the information you need to make the best choice for your household.

What Are the Advantages of Prepaid Electricity Plans?

• Enjoy Cost Certainty: When you sign up for a prepaid energy plan, you can decide exactly how much you’re going to spend for the month. That cost certainty can help you make more informed decisions about the rest of your budget rather than waiting until the end of the month to find out how much you owe on your electricity bill.
• Monitor Your Consumption in Real Time: Prepaid plans are typically linked to a smart meter, which provides you visibility into how much electricity you use. This is important not only in helping you avoid going over your limit, but giving you insight into when and how you’re using the most energy. This knowledge allows you to make targeted energy-efficiency improvements to bring down your total bill.
• Feel the Incentive to Conserve: Energy efficiency is a laudable goal no matter how you pay your utility bills: you’ll save money and lower your environmental impact. However, on a prepaid plan you have an even greater incentive to keep your electricity usage low; consuming more than you've budgeted results in an unplanned expense and puts you at risk of having your service cut off if you don't replenish your balance.
• Maintain Your Flexibility: If you move frequently – or could be relocating in the near future – prepaid plans are a great way to avoid long-term utility contracts. Instead, you'll pay for energy for only as long as you plan on sticking around.
• No Credit, No Problem: People with limited incomes or low credit scores can have difficulties signing up for contract plans, but that’s not a concern when you pay in advance. You don’t need a credit check to use something you’ve already paid for.
• No Deposits Necessary: Deposits can be another challenge for cash-strapped families who don’t have the lump sum on hand to open a monthly contract with a utility company. Prepaid plans don’t require a deposit, so you only have to come up with the money for the energy itself.

What Are the Advantages of Contract Energy Plans?

• Lock in Your Rate: If you sign a contract with a fixed rate, you know exactly how much you’ll pay per kilowatt-hour for the duration of the agreement. On the other hand, pay-as-you-go customers can be subject to frequent rate changes, which means that if you've only budgeted to pay the same amount every month you could end up with less electricity for your money.
• Save Your Money Until the Next Paycheck: Since you don’t pay until after you’ve been billed at the end of the month, a contract plan gives you a few extra paychecks to gather together the money you need to cover your bill, which can be an important consideration if you don’t have cash on hand.
• Less Worry Over Loss of Service: If you’re on a contract plan, as long as you pay your bill each month you don’t have to worry about service interruptions, other than blackouts due to unplanned events like a storm. Families on prepaid plans have to be more careful about their consumption lest they use more electricity than they budgeted for and risking disconnection if they don't replenish their account balance.
• Build Up Your Alternative Credit Scores: Unfortunately, paying a monthly utility bill won’t help you build up your traditional FICO credit score (although failing to pay is another matter – that will cause your score to get dinged). However, there are groups that provide alternative credit scores which do take your utility bills into account as evidence you're a reliable payer. Although these alternative scores aren’t nearly as mainstream as the FICO ratings issued by the three major credit reporting agencies, they can be helpful when seeking a loan, particularly for people who don’t have a long borrowing history.

Find the Energy Payment Plan That Fits Your Lifestyle

Ultimately there’s no one-size-fits-all answer for what type of payment plan is best. Prepaid plans can be very attractive to lower-income families, those facing credit challenges or those who want to budget more closely, while contract plans have their own benefits as well. Weigh the considerations above carefully to decide which type of plan is the best fit for your lifestyle.