To create passwords, make up one different than the one you use to access computers. Although MUDs encrypt passwords for storage, nothing prevents an unscrupulous MUD administrator from intercepting that password and using it for unethical purposes. It is also recommended that you use a password with numbers and mixed upper and lower case letters in it.
What should I use as a password for my MUD character?
You should pick a password just as you do for any computer account. Use a word, or better yet, a phrase or anagram, at isn't obvious. Don't, for instance, use the same name as your character, or your own first name, or your rl/boyfriend's name. And never never use the same password as the one on your computer account. RetroMUD prevents people from getting the passwords from within the MUD, and most encrypt the password when it's store in the database files. It's also not a good idea to use the same password on different MUDs, since if your password gets out on one MUD, all your MUD characters have been compromised. Use the auto-login feature of your client, if it has one, and protect the file containing the login information against reading by others.