I am experiencing an issue in NPSP, where Contacts and Household Accounts are automatically created in system.

There's no such setting.

I think what you're looking at is the older setting for creating Household Custom *Object* records, left over from before NPSP was using standard Accounts as Households.

It will be challenging for anyone to help you further without more detail. What exactly is being created that shouldn't, and under what circumstances?

It's also a good idea to do the NPSP Trails - they'll explain a lot about how the model is meant to work that might clear up some confusion.