Making char cloth creates a lot of smoke, you don't want to do it in the house. I did it outside next to the dorms the first time and was scared to death someone would call the cops or fire department.

The times I've made mine, I used a camping stove although a campfire will work fine. I used an Altoids Sours tin with approximately an 1/8 inch hole punched top and bottom with a nail. Cut squares of cloth (I've used light cotton and I've used denim) just small enough to fit in the tin. Then put it on the stove until smoke stops coming out. Take it off and plug the holes (or just the top one) with a pointy stick. You'll want barbecue tongs or something to pick up the tin with. Let the tin cool completely before opening or else the char cloth will catch fire when oxygen rushes into the tin. The cloth should be completely black, not brown. It will be fragile, really easily torn, but it shouldn't completely crumble with you touch it.

Also, I found unraveled jute twine to be perfect for getting a flame once you catch a spark with the char cloth. So much easier then even cotton balls.