Character creation (also character generation or character design) is the process of defining a character for a game. The term usually refers to the creation of Player Characters by the players.
Statistics & Traits
The process of defining a character's abilities varies wildly from game to game, and is a key element of the system.
RPGs must regulate what a character can do in any given situation, so they have to specify the character's abilities in a way that's helpful in determining what they can do. Often this takes the form of ability scores: numerical ratings that quantify how good a character is at certain types of action. The game will use these in some (hopefully simple) mathematical formulas during play to determine what number you have to roll to succeed, or if it's a diceless game maybe you'll just compare numbers.
When you're making a character you'll probably care a lot about which of these scores will benefit you the most. Even though many games have abilities with similar names and descriptions, the situations where those abilities are actually important vary widely. Dungeons and Dragons players often pay little attention to their character's Charisma score, because there are few situations where Charisma will either save your life or get you better loot, and those are the things that D&D players are mainly concerned with.
Where an ability is something that every character has more or less of, a trait is something that your character might not have. A skill is a common kind of trait; skills typically give bonuses to one of your character's ability scores when they're doing something that they're skilled in, so to speak. Other sorts of traits often give bonuses to scores in other, stranger conditions, but some traits actually change the game's rules somehow. Traits often have scores of their own, but sometimes you either have one or you don't.
The various numerical ratings that a character has are collectively referred to as their statistics, or "stats". Ability scores are often called "base stats," since a lot of games use them as a basis for determining a lot of other scores that you'll use more often.
Early RPGs often used dice rolls to produce a character's statistics; the player would then design the character around these predefined attributes. Later systems placed more of an emphasis on player choice and deliberate design, frequently in the form of point buy mechanics. Some systems use keywords instead of numerical stats.
Personality & Background
Methods of defining a character's history and personality are less clearly defined. Some games (including the infamous FATAL) include mechanics for personality traits, while others generate attributes and skills as a result of rolls on a background history table. Even these games only provide general ideas such as 'the character is cantankerous' or 'the characters served in the military', leaving the players to imagine the details.
There are as many ways of coming up with a background and personality as there are gaming groups.
Some players commission portraits of their characters or draw a sketch on the sheet, while others are satisfied with a short description.