I have just made a very simple sprite sheet to test out to new character creator. But when I enter the "create a new character menu", give it the right file address for the spritesheet, and defined the torso, and then it gives me the error "CANNOT EDIT THE CHARACTERS DEFINED IN THE VANILLA CONTENT PACKAGE". I've asked around but no one seems to have any input on it, am I missing something?

You can't edit the default Vanilla content package. You need to create a new content package for that.