Prepaid Electricity Pros & Cons

With a postpaid or traditional contract plan, you will be billed for your usage after the fact, usually on a monthly basis. These plans can come with contracts and deposits and often offer a fixed energy rate.

Pros and cons of prepaid electricity

Prepaid Electricity is not for everyone. To help you decide if it’s right for you, we compiled a list of pros and cons. 

Pros:

1. Easier budgeting. You’re in complete control of how much you pay and when. You can make payments online or by phone at any time, and as long as you keep a positive balance in your account, the electricity keeps flowing. 
2. Easy alerts. You’ll receive text or email alerts when your account is running low, along with estimates of how many days your remaining balance will last. 
3. Detailed usage information. You’ll have online access to detailed information about your electricity consumption, which can help you develop strategies to further reduce your electricity costs.
4. The advantage of variable rates. While high-demand seasons can increase variable rates, you’ll enjoy a reprieve with lower rates in cooler seasons. During these months, your payments will go further, and you’ll have room to save up for the rate increases. Cooler weather also makes it easier to engage in energy-saving habits, making it even easier to save.
5. No deposits, no credit checks and no commitment. Best of all, prepaid electricity plans are quick and easy to set up, with no credit checks, deposits or contracts required. Simply open an account and add funds, and the electricity will flow.

Cons:

1. Higher rates. When you’re evaluating the pros and cons of prepaid electricity, you’ll find that there are very few downsides. In most cases, the only downside to a prepaid plan is that the rate per kilowatt-hour (kWh) may be slightly higher than the rates on comparable traditional postpaid plans.
2. The downside of variable rates. You may also run into more variable-rate prepaid plans than you would with traditional plans. With variable rates, your energy rate per kWh can change with the seasons, increasing during high-demand periods. That means during hot Texas summers, when everyone is blasting their AC, these seasonal rates could be much higher than desired, making it harder to stretch your dollar.

Who should get a prepaid electricity plan?

Here are some of the circumstances that make a prepaid electricity plan a perfect fit for you:

• You have bad credit or no credit. With post-paid electricity plans, some electricity providers may require deposits or refuse service if you have a low FICO credit score or if the National Consumer Telecom & Utilities Exchange (NCTUE) has records of late or unpaid utility bills. But with a prepaid electricity plan, credit checks won’t hold you back.
• If you have no credit, you might also find that electricity providers require a deposit for postpaid plans. A prepaid plan is a cheap and easy way to establish a record of timely payments, which can make those deposit requests disappear.
• You’re on a tight budget. Deposits, billing fees and the occasional sticker shock from big bills can make it difficult to keep the lights on if you’re low on funds. A prepaid plan lets you avoid unnecessary costs and big bills and allows you to easily track your usage and your budget.
• You’re a stickler for energy conservation. If you’re really trying to minimize your household electricity consumption, a pay-as-you-go plan can be a functional part of that strategy. You may be more aware of how much electricity you’re using with the help of alerts, real-time data and total control over your payment schedule.
• You’re on-the-go. Most post-paid plans require contract commitments of months or years. If you’re a frequent mover or if you have plans to relocate soon, a prepaid electricity plan can give you month-to-month flexibility.

Who should get a contract electricity plan?

For some people, a postpaid or contract electricity plan is a better fit for their lifestyle. Here are some situations in which a contract electricity plan is a better fit:

• You  want to lock in a competitive fixed rate. If you want to take advantage of lower fixed rates in the marketplace, then locking in a contract electricity plan over multiple years could be a great fit for you.
• You crave stability and predictability. With a postpaid electricity plan, you pay for your usage after the fact at a set billing date every month. And when you factor in the low, competitive rate you locked in over multiple years, it's pretty easy to approximate what your bill will be each month. In addition, contract electricity plans free you from worry about constantly monitoring your usage and your account balance.
• You want another way to build your credit. While you can't impact your FICO score by paying your bills in full and on time, there are alternative credit score groups out there who take paying utility bills in full and on time into consideration when issuing credit. 
• You or someone in your household has a critical care or chronic care condition as defined by your utility. If losing electricity service could result in a serious illness or a dangerous or life-threatening condition, then you are only eligible for a contract electricity service.
• You have a good credit history and can afford a deposit. Deposits are often required for starting a new utility service and can be 1-2 times the amount of a monthly bill.

We're Here to Help

Nobody wants to spend more on household bills than necessary. But you can’t exactly cut out the essentials, like electricity, altogether! If you’re exploring ways to save, you might have come across the concept of prepaid energy.

With this type of payment model, you put money into an account, and your electricity bill is paid from that account using those funds. When the balance is running low, you simply add more money to the account.

But does this payment model actually save you cash—and what happens if your account balance gets too low? Does your power simply get switched off? And how can you track the funds in your account and your power usage? There’s a lot to figure out.

Read on for the answers to these and other essential questions about prepaid energy. The below pros and cons can help you decide if it’s the right type of plan for your household’s needs.

What is prepaid energy?

Prepaid energy is a type of electricity plan in which homeowners pay for their power in advance. The customer sets up an account with the relevant energy provider and funds that account with their own money. Money is then deducted from the pre-funded account in line with the customer’s energy usage. As the balance in the prepaid account decreases, the customer can add more funds.

Prepaid vs. postpaid energy

For many households, prepaid energy can be a smart alternative to postpaid energy. In a postpaid plan, there isn’t any advance payment. The electric company simply calculates the household’s energy usage and then sends a bill to be paid at regular intervals, usually monthly.

In a prepaid energy plan, the customer sets up a prepaid account that they fund when and how they want. The money needed to pay for their electricity use is then deducted from this account—which they can refill regularly—according to their energy usage.

Why would a household opt for a prepaid plan over a postpaid plan? Some people find it easier to monitor their energy usage using prepaid plans—and even report saving money using prepaid plans. That said, there are drawbacks to prepaid plans versus postpaid plans. Learn more about the pros and cons below.

How does prepaid electricity work?

Prepaid energy plans have gained popularity thanks to the flexibility they offer. While they aren’t available in every state, those with deregulated energy markets—like Texas—offer them.

To enroll in a prepaid energy plan in Texas, you need a local address and a smart meter in your home (if you don’t have a smart meter, the power company can install one). Homes with a smart meter can often be connected to the power grid and activated remotely on the same day.

You then deposit money into your account before you start using electricity. The money to pay for your power use is then deducted from that account. You can fund the account easily via online payments or on the website. It’s also possible to fund the account via phone or in person at a MoneyGram location.

Your home’s smart meter is read daily, and you’ll receive a notification via email or text message that tells you how much power you’re using. Your daily report will show how many kilowatt-hours you’ve consumed, your remaining account balance, your savings for the day, and how many days of power (estimated) you have left, given your current balance.

Learn more about how prepaid energy works.

Pros of having prepaid energy

If you’re considering prepaid energy, you’re probably wondering what the benefits are. Here are some of the advantages.

No credit check or deposit

Unfortunately, bad credit can stand in the way of securing a traditional postpaid plan with retail electric providers. Here’s the good news: A prepaid plan doesn’t require a credit check or security deposit like a postpaid plan would. This is why prepaid energy plans are also called “no deposit electricity” or “no credit check electricity.”

This means that a prepaid service is accessible to you, even if you don’t have a great credit history. Your financial past doesn’t have to get in the way of you accessing this basic everyday need.

Quick and easy same-day connection

Since prepaid plans have a low barrier to entry, without the need for a security deposit or credit check, they’re fast and easy to set up. Same-day connection is often possible. Depending on your location, if you already have a smart meter installed in your home, you can connect and activate your plan remotely within four to six hours.

If you don’t yet have a smart meter, same-day activation likely won’t be possible. You’ll need to wait at least a day for a technician to come to your home and install the smart meter.

Transparency and real-time notifications

Prepaid electric services can be a great way to save money because they allow you to track daily electricity use easily. Most providers will email or text you a daily usage report, so you’re always in the know. This transparency makes it easy to monitor and control your electric usage and cut costs—more on that next.