If I upgrade my phone with my carrier, I have to stay with them for 2 years. But if I have no plan to change carrier anyway, does this make upgrading the obviously better choice than buying an unlocked phones?
Besides the contract, what's the difference between upgrading and buying unlocked?
If you add up the total payments on the phone and compare it to the price of buying an unlocked phone, you'll be able to see if there is any financial advantage to one way or the other.
Often (at least in the U.S.) the 2-year total of phone payments adds up to the retail cost of an unlocked phone almost exactly -- in other words, you aren't paying interest, so making payments is like getting an interest-free loan. Add it up and see if there's a difference for you.
If the phone is "included" in the cost of your phone plan and you don't make itemized payments for the phone itself, be aware that the monthly price of that plan is higher because it subsidizes the cost of the phone. Crucially, once you are out of contract, you will still have to pay that higher monthly price. That's a win for the carrier and a bad plan for you. At that point, you are better off keeping the phone and getting a different, cheaper, phone plan or upgrading to a new phone.
Having a carrier-locked phone may make using it in other countries difficult or expensive compared to buying a local SIM card. You can generally get the unlock code after the phone is paid off, or buy it from one of the companies which specializes in breaking the code systems for these, but that's either a delay or extra cost.
If the upgrade is "free", you're already paying for it so you might as well take it. Otherwise, as others have said, the advantage is mostly a 0% loan... which isn't that big an advantage on a small purchase; you need to decide if it's worth the possible hassle.
In addition to considering your total expenditures on the plan and phone for either case, consider that the value you get from a locked vs. an unlocked phone of the same model are different:
I always buy unlocked, but I work in computers so the security issue is a big one for me. If you never log into anything from your phone and only use it for calls, SMS, and games, plus don't let it on your home or work wifi, you may not care.
There is another option: renewing the contract for another two years without getting a new phone and negotiating for better terms or a lower monthly charge.
You can still get your phone unlocked as it has been paid off, which allows you to use local SIM cards when traveling abroad.
The downside of not getting a new phone is that the current one's battery is already two years old, and will deteriorate over time. If you can exchange the battery easily, you should still be able to get replacements as there is a huge market for that (I can still get them for my Nokia 6230i, FWIW), but if that isn't possible, you run the risk of having to buy a new phone at full price at some point (but then again you save on your next contract, and when traveling abroad).
In the UK an upgraded (locked) phone is either available because you've already paid for it by continuing with an expensive contract for (typically) at least two years after you'd paid off your last handset or is available if you commit to a new 2-year tie-in with the carrier.
Mostly, when I have compared them, it is cheaper to buy an unlocked 'phone and go with a SIM-only contract with the carrier. It also often gives you a bigger range of handsets that you can choose from... you might want a different colour 'phone or a higher memory spec or even a handset the carrier doesn't brand and lock. The other consideration even if you find the carrier is no more expensive is ... if you continue the contract beyond it's term they will continue to charge you for the purchase price of the 'phone after you've paid for it. That's changed a bit since a number of carriers in the UK now charge you a 2-part monthly fee - 24 months of 'paying for the handset' and 'until you cancel it paying for the call and data package'...
The other reason it may cost you more is that the latest and greatest 'phone on contract often is tied to a high call / data package... if you want the latest handset you may be buying more calls / data than you want just to get the handset. In which case, even if the 'interest' on the contract handset is zero you are still paying a premium.
You need to do the sums... for me it was a no-brainer, the latest unlocked phone from the cheapest supplier and a SIM-only contract that meets my needs is saving me lots over a 2-year period... I think it means I'm saving about 20% overall in a 2 year period.
Plus... if you really do like the latest handset, you have the freedom to sell it when something better comes out, you're not tied to keeping it for 2 years.
I don't travel much outside of my country, so unlocking is not about being portable when travelling. In Canada (I know you're asking about the USA, but I think it's still worthwhile), on every plan I have with my carrier, I get an immediate 10% off what's advertised, as I have a "BYOD" (Bring Your Own Device) phone.
I purchase my phones on the Internet from the manufacturer directly, and it comes unlocked. I simply put in the SIM card, and it works. I've also used this as leverage for cheaper deals when I hear other people getting a better deal than I am.
I also do not like being in contracts, so I have the freedom to drop my carrier anytime, and they know that. They will bend over backwards to keep me, and it only works out in my favour. Having that kind of control makes me happier to deal with whoever has the best deal.
I will approach this from the other angle. Lets make some assumptions first.
Now with those assumptions in place you have a few things you need to look at. Most of them are guessing and risk.
First, no lock in is better then some lock in. If all other things are equal, then not be locked in will give you the most flexibility and bargaining power should you want or need it.
Second, contracts are not always a bad thing, often they can work to your advantage. By being "in contract" you have a fixed price. Without the contract the price may change. Maybe as frequently as every month. Contracts also, at times, come with better pricing. So make sure to look at the cost of plans both with and without contracts.
Third, When out of contract you can haggle. "I will move to carrier two if you don't address you high cost of data," for example. Often times this can result in the carrier giving you a credit or better pricing. If your on contract there is no reason to give you a better price.
Finally, credit scores and consumer reports. This will depend a lot on the carrier. Essentially it looks better to off contract with a good payment history, then on a new contract with a good payment history. However this effect is lessened on a old contract with good payment history.
In my opinion, your much better off with an unlocked phone, then a contract. There are upsides to a contract that should not be ignored, but in the end, the flexibility of being off contract in conjunction with barging power usually work out better.
Say you have the option of buying a phone for £240 and paying £10 per month for a SIM only contract, or paying £30 per month for a 12 month contract that includes the phone. (Most "free upgrades" include a new lockin of 12 or 24 months.)
The phone company knows that most people will not switch to a SIM only contract at the end of the 12 months, as you have to give 30 days’ notice etc. So unless you are one of the 1 in 20 people that will remember to give notice at month 11, it is best to buy the phone outright to start with.
I've personally moved from a contract phone to a unlocked phone + SIM only deal for the following reasons:
