A composite character is COMPOSED (like in a piece of music, a painting or a sculpture) in order to create a FICTIONAL figure who does not have an evident correlation to person x or y in the real life. Of course, he or she has typical features referring to popular or extraordinaire ways of thinking and acting in the "reality." In the sum, he or she is an artificial creation, an invention. Nevertheless, his or her adventures or experiences always have a connection to the "real" life (our dreams, wishes, fears, good or bad experiences etc.)
The crux of the matter is the difference between fictional and nonfictional literature.