I create characters on a whim, but I guess I have a few steps I follow.
First question: what is their occupation? Are they a high school student, a merchant, a fire mage, a traveler?
This one is actually the main, after that you are just thinking it through.
Second: what is their personality? Here comes the color palette, choice of details.
Third: what is their background? Things like if the clothes are new, how their wardrobe is limited, if they have some special items with them.
I made some design changes for a few characters after thinking them through a bit, like Washuu here is a priestess and a daugher of a noble family, so her having such plain clothes in the beginning had a little sense. Instead she looks much more flashy and out of place (as she should), has clothes and items suited for a gal of her status. This will change too as time goes on and she loses this sheen, so this before-after will basically switch places =)