Why do they have the centripetal force in there? I understand that the normal force is the centripetal force here, but why would they say "or $\frac{mv^2}{r}$"? I thought it was wrong to include this.
Well, I guess it's not technically wrong, since the normal force will have a value equal to $\frac{mv^2}{r}$ in this particular situation. But it is misleading. Students who are just learning about circular motion have a tendency to think that $\frac{mv^2}{r}$ is a force in its own right, separate from any other forces that may exist in the problem. If you let them write $\frac{mv^2}{r}$ on a free body diagram, it just reinforces that erroneous thought.
In reality, of course, the fact that any force (or sum of forces) equals $\frac{mv^2}{r}$ can only be concluded after applying Newton's second law. In particular, the quantity $\frac{mv^2}{r}$ comes from the $ma$ side of the equation. It's not supposed to appear in the sum of forces. And since, for convenience, you usually want to be able to copy the forces directly from a free-body diagram into that sum, it helps not to put $\frac{mv^2}{r}$ on the diagram.
Also, on centripetal force, how come there is a net force inwards to the center, but there is no REAL force counterbalancing? Why do we have a fictitious force?
There is no fictitious force in this diagram. The normal force is very real. But the reason there does not need to be any force counterbalancing it is that the object is accelerating.