In Drupal CMS, what I understand is that version 8 is different in terms of coding to version 7. If I write code myself then I do not have to use Contribute Module?
So for upgrading self written code from version 7 to version 8, I need to use Custom Module? Or am I totally wrong?
A contributed module is a module, which was made by the community and then released on drupal.org so others can use them.
A custom module, is a module, which you write yourself for your own project(s).
Speaking of that, a custom module can also become a contributed module.
To answer your question: It does not really matter in what folder you put it in. It just is more structured/cleaner if you put your own modules inside the custom and modules from other people in contributed.