In order to use the passwords you need to get Dragon Arena, you can get Dragon Arena by finishing all character's Dragon Universe mode (including Uub and Broly's).
After you get Dragon Arena you select Dragon Arena, pick your character and then you see a big list of opponents which you can fight, in order to put in a password you gotta press R1 or R2 then you will switch and see a blank list there you can insert the passwords.