Yes, you are doing several things wrong.
(Dropbear - the default) SSH over USB cable to 'main' OS:
No password required, No username required, if challenged for either, press 'enter'
TelNeT over USB cable to 'main' OS:
TelNet does not use passwords.
Kindle's IP address for its end of the cable is as set in the config file.
Be certain you are not trying to use the IP address assigned to the PC end of the cable (unless you really mean to ssh or telnet into your own PC).
Networking over the USB cable depends on physical security - it is assumed you have the entire length of the USB cable in easy view and could tell if it was wire-tapped.
Networking over Wifi for either Dropbear or OpenSSH server (Dropbear is the default):
Kindle end of the connection IP address - as assigned by DHCP (usually your AP/Router).
Public key authentication (the recommend and documented) would work, if you followed the directions for doing PuBKey auth.
User/Password authentication - will also work, if you set root's password with the passwd command - not recommended, the change will disappear with the next update).
IIRC - TelNet over Wifi is blocked - considered non-secure.
= = = = =
The root
assword generated by KindleTool is for the 'Diags' OS.
Kindles are dual boot.
Installation of the RP is what installs an SSH server into 'Diags'.