Okay, here’s how this scheme works. Some service gets breached. There are lots and lots of service breaches, too.
Every password associated with each account listed in that and in every other breach is then tried on every other service.
Continuously.
Forever.
Re-use a password, and some miscreant will now have access to that service, and whatever additional access can be gained from there. Access ro an Apple,ID (and particularly one without two-factor enabled) is a Bad Day for the account holder, too.
Put differently... Duplicate passwords will get found, just as soon as there’s one been included in a server breach.
And if Apple is reporting this diagnostic, then the password is known to be associated with the account. Bad Day.
As for determining the number of breaches thar an email address has been found, see
https://haveibeenpwned.com/
Further reading over there will provide further background, too.
Resetting the phone is not necessary. Unique passwords are strongly suggested. Two-factor on important accounts such as your Apple ID, too.