When you change your contact's status from Prospect to Active, Hot Lead or Buyer, you will create a username and password for them. When you click to save the changes you will receive a pop-up asking if you want to send an email that includes the login information. See screenshot below.
If you click "No" then you will need to manually send the client their login information.
If you click "Yes" then an email to the contact will open allowing you to edit and send their login information to the immediately.