I was going to start my own thread to outline how some of this stuff works--at least for one fairly conservative Canadian bank--but this seems like a good place to do it.
Before I start, I will say that the anecdotal evidence on this board seems to indicate that most major US banks have far more liberal underwriting policies than their Canadian counterparts. Canadian banks are highly regulated by the federal government, and I suspect that much of their conservatism is regulated into existence by that government. The information I am providing below is specific to the one Canadian bank where I worked, but it is my understanding that it's pretty typical of the Canadian banking system at large. It is also likely that some US banks have similar lending policies, though not necessarily. Extrapolate at your own risk!
To start, Canadian banks ask for your gross monthly income, just like any other bank. They also ask for your monthly rent or mortgage obligations and possibly utilities as well (depending on the application type). The rule for mortgage applications is that only a certain percentage of your gross income is allowed to go towards debt servicing. I can't remember the exact number, but I think it was either 35 or 40% or so. It may have been as high as 45%. My job wasn't specifically in this area, though I did sit in on a few meetings where these issues were discussed. I therefore got a pretty good sense of how it worked overall, but I don't necessarily remember every detail. For arguments sake, I will use the 40% number.
So, if a customer makes $70,000 per year gross, we would divide that by 12 months to get $5,833 per month gross income. Of this amount, 40% is allowed to go to debt servicing, so $2333.20. I'm not entirely sure if this amount includes the mortgage payments or if it is kept separate from the mortgage you are applying for, but I do know that it's much more difficult to get approved for unsecured credit in Canada than for mortgages. LOCs are extremely difficult to obtain as the bank has only one revenue stream from a LOC (i.e., interest payments and no merchant/swipe fees as with CCs). The interest rates are usually much lower too, so banks are reluctant to give them out except to those with top notch credit and solid income. Also keep in mind that most mortgage applications these days (or at least many) are from couples with two incomes, so something north of $100K/year combined is not all that unusual.
Now here's the interesting part... If a customer has $100,000 in total available credit across all credit cards, LOCs, auto loans, whatever, then the bank uses this number to calculate their monthly debt obligations regardless of whether the customer is carrying a balance or not. Since in Canada most credit cards etc. require either a 2% or 3% minimum monthly payment on the outstanding balance, the bank that I worked for used the higher number (3%) and would multiply that number by the $100,000 in total limits to determine your monthly debt servicing obligation.
This means that the above customer would have $3,000 in debt obligations per month and only $2333.20 available for servicing their debt, even if they never used their CCs at all. I am sure that this will come as a huge surprise to many! In such a case, the bank would not approve the customer's mortgage application without the customer meeting certain conditions (i.e., closing some of their other credit products or increasing their income such that the total monthly debt obligation becomes lower than the total monthly income available for debt servicing).
Also, in Canada it is practically unheard of for someone to have total credit card limits in excess of their gross annual income--a practice that is certainly not advisable!! When including mortgages and auto loans, this no longer remains true. Many mortgages alone are higher than the person's annual income.
As an adviser myself, I always suggested that customers limit their total unsecured (i.e., CC & LOC) limits to a number somewhere in the range of 1/2 to 2/3 of their total gross annual income, and this was at the upper end of advisable limits. So, if you make $60K per year, then you are relatively safe with $30-$40K in total CC & LOC limits, though you would be ill advised to run those limits up!
A good rule of thumb for someone making $60K/year might be to have one $10,000 LOC, two $5,000 credit cards, and a few $1-2K cards totaling between $10 & $20K.
Also, I personally prefer to spread my available credit across 8 or 10 accounts at any given time. For extremely high income earners, I would suggest having your higher limits on your LOCs rather than your CCs. In general, two revolving accounts of $5,000 or more with at least two years of clean history each is enough to get you approved for a mortgage or a high end CC as long as there is nothing negative in your credit history (and meet the minimum income requirement for an Infinite VISA or World Elite MC).
Also, in Canada it's the history that is important. FICO scores are used, as are other scoring models, but your reported credit history trumps FICO by a landslide. FICO is significantly overvalued in this forum as well (for obvious reasons). Internal rating systems within the banks are also much more important than FICOs if you are an existing customer. FICOs are mostly important for instant CC approvals. If the computer is sufficiently impressed, you may be approved. For the most part this is not true in Canada, where many banks don't even have an instant approval system. Manual review of your app. and credit file is pretty standard here.
When people apply for credit cards, the total debt servicing percentage may or may not come into effect--I'm not quite sure. It likely is in effect, only with a lower allowable percentage as the credit is unsecured. However, the bank is never going to approve any kind of a credit product that causes a customer to become overextended. If the 3% minimum payment on a card approval will cause your debt obligations to exceed your monthly resources for paying it back, the app. will certainly be denied. And the rule about counting total available limits as debt obligations whether or not they are being utilized is absolute! There's no getting around that one!
Finally, there is always the possibility of exceptions, though they are very rare and may require having a branch manager friend to pull some strings for you.
I hope that some of this info proves useful to everyone!
G
...thank you Citi