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Description
While I will be using "human" and "person" here, this applies to any character, of any race or species. If they can think, this can apply.

I get a lot of people asking me how I create characters, but more often they ask how I create such believable characters. About 50% of it is just observation and (as ridiculous as it sounds) practice. I watch people around me, dissect how they think and move, and then impart what I've learned into my creations. And I've had a lot of practice at it, what with years of role playing over hundreds, maybe even a thousand characters. You learn how to differentiate with the smallest distinctions.

The most common method I see people use is starting with the physical. There's nothing wrong with this, per se, but this method is what steers people into the path of the Mary Sue. You end up with a person who is the sum of what they look like, with a personality tacked onto the end. Some master this craft and still manage to create wonderful characters, and sometimes the physical is deeply important to any character development the person has. Most of the time however, especially in the beginning, you'll end up with a shallow character.
I learned this lesson the hard way with my so-called "Original Six", aka the oldest and therefore rawest characters I have. Most of those six have had to be completely reworked from the ground up over the course of role playing with them in order to make them sufficiently believable. It's that reworking process that actually has endeared me to them so greatly. When you manage to make the character click, and you'll know it when you do, there's nothing quite like that feeling.
So, evidently starting with a physical description isn't the best way to go. The question then is, what is?

Over the years I have found I use one of two methods when creating characters. Both of these follow a "rule of three" (and yes I have made all this up, so stop rolling your eyes at me). I didn't learn this out of a book, no one taught it to me, it's just the methodology that works best for me. Feel free to use it or twist it to suit yourself.

The Three Questions
If you are inserting a character into an already-established plotline, this can be the easier of the two methods to work with. However, if you are starting completely from scratch with no real grasp of your plot or setting, the Three Truths method may be more useful for you.
I developed this method because I roleplayed. I was often told "I need a _____ to put in a ______" and then expected to pull a character out of thin air. I found that asking myself three questions would help me create the best character for the situation. The questions are as follows; Why, Where and Who, and yes the order matters.

WhyThe first question to ask yourself is why is this character needed? What purpose is it going to serve? For the sake of simplicity here I'm going to be explaining this in terms of a long-time OC of mine, Fred, who is a marginally overweight gay 20-something who enjoys cooking and keeping house, is friendly, honest, and very loyal.
I was asked to create a rebound-date for Blaise, who had been brutally dumped by his boyfriend and needed something to restore his confidence. That right there was the perfect place to start. Why was my character needed? Because he was to bring back Blaise's will to put himself out there. He'd need to be a little bit clingy and submissive, the every-man boyfriend who could keep house and be whatever he needed to be. He also needed to be loyal, and enough of a catch to be worth Blaise's attention without making Blaise feel constantly threatened. A pretty solid place to start if I do say so myself.
WhereThe next thing to consider is the setting. Where does this character need to fit into? Blaise belonged to a Harry-Potter-esque plotline, with magic and the like, and worked steady hours for a good income, as well as being (somewhat) old money. It made sense then that Fred be an ordinary human, with no special powers. This would allow him to look up to Blaise and his "gifts". It also made sense to have Fred be good at and enjoy keeping house so that he could be a good house-husband. Simple deductions can go a long way.
WhoThe final question involves the most thinking. This is where you really flesh out who your character is going to be. Don't be afraid to draw connections. Fred needed to be good at household chores like cooking and doing laundry. He also needed to be somewhat confident in his sexuality, while still allowing Blaise to take the lead. A bad childhood that forced him to think for himself would fit both requirements. Maybe his dad was very anti-gay and sent him to a military boarding school to "shape up", which resulted in Fred escaping from training and drills by hiding out with the staff, who he would have befriended with his open and caring nature. There he'd learn to cook, clean and do laundry. Perhaps his mother didn't believe Fred was a sin, but didn't dare go against his father. She blames her weakness for him running away from the academy but was too afraid of his father's violent temper to do anything. Fred is afraid of turning out like his dad so he's become more of a gentle giant.
You see how this works? One small detail expands out into a ton of background information and character development.

It'll be tough the first few times but again, half of this is just practice. In time you'll be able to run through the questions in the space of a minute or two.

The Three Truths
This can be the more difficult of the methods, and takes a long time to master. Essentially, I believe every character (and actually every real life person) can be boiled down to three essential truths about themselves. Some might call these morals, or ethics, whatever terminology works for you is fine. Essentially, it's three declarative statements that will always be true about that character, no matter what they're going through in their life. They can be about the character, how they interact with the outside world, how they think, anything really. But they have to be the most basic ideas possible.
If you can find those three rules, you basically have a flow chart that will answer any question you might have about that character from then on.

Confused? Let me give you a few examples.
Let's do Jager as our first example. Over the years I've boiled him down to this;
1. Everyone is equal and deserving of respect until proven otherwise, irregardless of gender, age or species.
2. Betrayal is a path worse than death and loyalty, once earned, is forever.
3. Ari is his entire world.These three sentences define him as a person, and govern his every action. If you're ever unsure how he'd act in a particular situation, you can ask yourself if his behavior would go against one of these rules. If not, it's probably okay. If so, it's not something he would ever do.

This can apply to real people too. I found the best test of this method, and the easiest way for me to wrap my head around it, was to find my own three truths.
1. I'm not afraid of death because I don't believe in an afterlife.
2. I don't want children because I can't imagine giving away that much of myself to someone else.
3. I'm deathly afraid of disappointing people to the point that I have to mask my anxiety with humor.
Heavy stuff, right? These three truths have to be the most fundamental building blocks of your character's existence.

In the spirit of full disclosure, I often only have one or maybe two of the truths fleshed out upon creation. However if you keep this principal in mind, you can deliberately try and fish out the other one or two over time. Being aware of this method will make you a more meticulous character creator, and a better writer because you will create more reliable, believable characters. It's also an excellent writing exercise to preform on some of your already-created characters.

I hope that something here might have been helpful for you! I am more than happy to answer any questions, and if you've found this useful let me know as I might think about sharing more tips in the future ;D

Description
While I will be using "human" and "person" here, this applies to any character, of any race or species. If they can think, this can apply.

I get a lot of people asking me how I create characters, but more often they ask how I create such believable characters. About 50% of it is just observation and (as ridiculous as it sounds) practice. I watch people around me, dissect how they think and move, and then impart what I've learned into my creations. And I've had a lot of practice at it, what with years of role playing over hundreds, maybe even a thousand characters. You learn how to differentiate with the smallest distinctions.

The most common method I see people use is starting with the physical. There's nothing wrong with this, per se, but this method is what steers people into the path of the Mary Sue. You end up with a person who is the sum of what they look like, with a personality tacked onto the end. Some master this craft and still manage to create wonderful characters, and sometimes the physical is deeply important to any character development the person has. Most of the time however, especially in the beginning, you'll end up with a shallow character.
I learned this lesson the hard way with my so-called "Original Six", aka the oldest and therefore rawest characters I have. Most of those six have had to be completely reworked from the ground up over the course of role playing with them in order to make them sufficiently believable. It's that reworking process that actually has endeared me to them so greatly. When you manage to make the character click, and you'll know it when you do, there's nothing quite like that feeling.
So, evidently starting with a physical description isn't the best way to go. The question then is, what is?

Over the years I have found I use one of two methods when creating characters. Both of these follow a "rule of three" (and yes I have made all this up, so stop rolling your eyes at me). I didn't learn this out of a book, no one taught it to me, it's just the methodology that works best for me. Feel free to use it or twist it to suit yourself.

The Three Questions
If you are inserting a character into an already-established plotline, this can be the easier of the two methods to work with. However, if you are starting completely from scratch with no real grasp of your plot or setting, the Three Truths method may be more useful for you.
I developed this method because I roleplayed. I was often told "I need a _____ to put in a ______" and then expected to pull a character out of thin air. I found that asking myself three questions would help me create the best character for the situation. The questions are as follows; Why, Where and Who, and yes the order matters.

WhyThe first question to ask yourself is why is this character needed? What purpose is it going to serve? For the sake of simplicity here I'm going to be explaining this in terms of a long-time OC of mine, Fred, who is a marginally overweight gay 20-something who enjoys cooking and keeping house, is friendly, honest, and very loyal.
I was asked to create a rebound-date for Blaise, who had been brutally dumped by his boyfriend and needed something to restore his confidence. That right there was the perfect place to start. Why was my character needed? Because he was to bring back Blaise's will to put himself out there. He'd need to be a little bit clingy and submissive, the every-man boyfriend who could keep house and be whatever he needed to be. He also needed to be loyal, and enough of a catch to be worth Blaise's attention without making Blaise feel constantly threatened. A pretty solid place to start if I do say so myself.
WhereThe next thing to consider is the setting. Where does this character need to fit into? Blaise belonged to a Harry-Potter-esque plotline, with magic and the like, and worked steady hours for a good income, as well as being (somewhat) old money. It made sense then that Fred be an ordinary human, with no special powers. This would allow him to look up to Blaise and his "gifts". It also made sense to have Fred be good at and enjoy keeping house so that he could be a good house-husband. Simple deductions can go a long way.
WhoThe final question involves the most thinking. This is where you really flesh out who your character is going to be. Don't be afraid to draw connections. Fred needed to be good at household chores like cooking and doing laundry. He also needed to be somewhat confident in his sexuality, while still allowing Blaise to take the lead. A bad childhood that forced him to think for himself would fit both requirements. Maybe his dad was very anti-gay and sent him to a military boarding school to "shape up", which resulted in Fred escaping from training and drills by hiding out with the staff, who he would have befriended with his open and caring nature. There he'd learn to cook, clean and do laundry. Perhaps his mother didn't believe Fred was a sin, but didn't dare go against his father. She blames her weakness for him running away from the academy but was too afraid of his father's violent temper to do anything. Fred is afraid of turning out like his dad so he's become more of a gentle giant.
You see how this works? One small detail expands out into a ton of background information and character development.

It'll be tough the first few times but again, half of this is just practice. In time you'll be able to run through the questions in the space of a minute or two.

The Three Truths
This can be the more difficult of the methods, and takes a long time to master. Essentially, I believe every character (and actually every real life person) can be boiled down to three essential truths about themselves. Some might call these morals, or ethics, whatever terminology works for you is fine. Essentially, it's three declarative statements that will always be true about that character, no matter what they're going through in their life. They can be about the character, how they interact with the outside world, how they think, anything really. But they have to be the most basic ideas possible.
If you can find those three rules, you basically have a flow chart that will answer any question you might have about that character from then on.

Confused? Let me give you a few examples.
Let's do Jager as our first example. Over the years I've boiled him down to this;
1. Everyone is equal and deserving of respect until proven otherwise, irregardless of gender, age or species.
2. Betrayal is a path worse than death and loyalty, once earned, is forever.
3. Ari is his entire world.These three sentences define him as a person, and govern his every action. If you're ever unsure how he'd act in a particular situation, you can ask yourself if his behavior would go against one of these rules. If not, it's probably okay. If so, it's not something he would ever do.

This can apply to real people too. I found the best test of this method, and the easiest way for me to wrap my head around it, was to find my own three truths.
1. I'm not afraid of death because I don't believe in an afterlife.
2. I don't want children because I can't imagine giving away that much of myself to someone else.
3. I'm deathly afraid of disappointing people to the point that I have to mask my anxiety with humor.
Heavy stuff, right? These three truths have to be the most fundamental building blocks of your character's existence.

In the spirit of full disclosure, I often only have one or maybe two of the truths fleshed out upon creation. However if you keep this principal in mind, you can deliberately try and fish out the other one or two over time. Being aware of this method will make you a more meticulous character creator, and a better writer because you will create more reliable, believable characters. It's also an excellent writing exercise to preform on some of your already-created characters.

I hope that something here might have been helpful for you! I am more than happy to answer any questions, and if you've found this useful let me know as I might think about sharing more tips in the future ;D