Prepaid electricity 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. Think of it like a health savings account (HSA): you put money in and use it as you see fit. This allows you to manage your energy usage better and reduces the chance of bill shock every month.

What are the advantages of prepaid electricity plans?

1. Enjoy cost certainty. The most significant difference between prepaid vs. contract energy plans is how you pay. When you sign up for a prepaid energy plan, you can decide exactly how much you will 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 determine how much you owe on your electricity bill.
2. Monitor your consumption in real-time. Prepaid plans are typically linked to a smart meter, which shows how much electricity you use daily. This helps you avoid exceeding your limit and gives insight into when you use the most energy. This knowledge allows you to make targeted energy-efficiency improvements to reduce your total bill.
3. Incentive to conserve. No matter how you pay your utility bills, energy efficiency is a laudable goal: you'll save money and lower your environmental impact. 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.
4. Maintain your flexibility. If you move frequently – or could be relocating soon – prepaid plans are a great way to avoid long-term utility contracts. Instead, you'll pay for energy as long as you plan on sticking around.
5. No credit, no problem. Prepaid energy plans are pay-in-advance, so you don't need a credit check to sign up.
6. No deposits necessary. Prepaid energy plans also don't require a deposit, so you only have to come up with the money for the energy itself.

Contract electricity plans

On a postpaid (contract) plan, you pay after the fact for the electricity you consumed the previous month. Think of it as filling your gas tank and paying the total amount due afterward. This is the most common plan and fits many people's needs. However, it may not be for you.

What are the advantages of contract electricity plans?

1. 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 your bill will likely fluctuate drastically during different seasons.
2. 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 the money you need to cover your bill.
3. Less worry over loss of service. If you're on a contract energy plan, as long as you pay your monthly bill, you don't have to worry about service interruptions other than blackouts due to unplanned events like a storm.
4. 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, some groups provide alternative credit scores that 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.
5. Find the energy payment plan that fits your lifestyle. Ultimately, there's no one-size-fits-all answer for the best payment plan type. 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 also have their own benefits. Weigh the considerations above carefully to decide which plan best fits your lifestyle.