OC stands for original character, that is, a fanfiction character that does not occur in canon. OCs breed like rabbits in the world of fandom. Anytime a new student transfers to Hogwarts, you have an OC on your hands.
Good OCs agree with the canon and blend into a continuum—they feasibly could have existed in the story, 'off-screen' and unknown to the viewer until they somehow became important. These characters usually inhabit goodfic, but if they are encountered on a mission can potentially be recruited or just left alone.
Bad OCs... don't do any of those things that good ones do. Most bad OCs are Mary Sues, but some are simply not notable. Some lack personality, but are not offensive, or simply fade into being generics. These characters sometimes inhabit badfic, but more often they inhabit mediocre fic that is neither good nor bad.
Even without considering characterization or looking for Sueishness, here are some things to consider when evaluating OCs:
- Could this character feasibly have grown up in this universe? In other words, do they have a name, culture, and socialization acceptable for the continuum in question? Or are they inexplicably different in culture or values from everybody else?
- Where does this character live in this universe? Whether a person is mentioned as being a dependent or having a job, do they have a house/home/place in the world? Or do they simply vanish when they're 'off-screen'?
- Could this character support him/herself in this universe? Where does their money come from? Do the possessions this character owns match his/her economic status, and if not, are they in debt because of this fact? Or have they been awarded random possessions with no rhyme or reason?
- Does this character comply with the established themes of the continuum they are colonizing? Are they suitably funny if the canon is comedic, or suitably meaningful if the canon is serious? Or do they not follow the canon's lead in terms of theme, tone, and mood?
- Could this character suitably interact with others in this universe? If this character interacts with main characters, is it natural or is it contrived?
- If any of these rules are broken, is there an explanation that suits the continuum? Could this character's unlikeliness be explained away by the canon's propensity for such things? Or is this strange new development out-of-place in a canon that doesn't see such things?
Chances are if the character scores a 'no' on one or more of these rules, they are worthy of examination: if not as a Sue, then as a Sue-accomplice or a simply useless/poorly written character.
It is one of the unfortunate side effects of the Mary Sue fanfiction invasion that OCs have earned a bad reputation among canon purists. In fact, there is nothing wrong with the concept of an original character being introduced to canon in fanfiction. It is simply the case that for every well-written OC, there are dozens, if not hundreds, of OC Mary Sues. With such a huge source of Sues eliminated, fanfiction without OCs is significantly more likely to be better-written than fanfiction with them. Because of the self-centered nature of the Mary Sue, the more prominent the OCs are in the story, the worse the fanfiction is likely to be—and the better odds you have of finding a Sue.
This conclusion isn't based on bias, but simple logic. If a staggering number of OCs are Mary Sues, then a lot of OC-heavy fic will also be Mary Sue-heavy fic. This casts a dark stain on the rest—unfairly. Many new installments of a canon contain expansions of some sort, be it expansion of setting, plot, or cast of characters.
For good examples of OCs, look no farther than most agents, who must be strong, well-balanced characters in their own right for their author to get Permission.