At the Main Menu, go to Options, then select Password. You can then enter the passwords there. You do need to purchase the passwords from a travelling merchant (who gives you two options to choose from, Password and A Extra Life) after completing the level and beating the level boss first in order to use them.

Password	Effect
Dalton - Dalton - Lucky Luke - Jolly Jumper	Level 7
Dalton - Lucky Luke - Dalton - Jolly Jumper	Level 3
Dalton - Rantanplan - Rantanplan - Dalton	Level 6
Jolly Jumper - Dalton - Rantanplan - Lucky Luke	Level 2
Jolly Jumper - Rantanplan - Rantanplan - Dalton	Level 9
Lucky Luke - Dalton - Jolly Jumper - Lucky Luke	Level 4
Lucky Luke - Jolly Jumper - Lucky Luke - Rantanplan	Level 10
Lucky Luke - Rantanplan - Dalton - Lucky Luke	Level 8
Rantanplan - Jolly Jumper - Dalton - Lucky Luke	Level 11
Rantanplan - Lucky Luke - Dalton - Dalton	Level 5