Alright ladies and gentlemen, after spending hours on research, re-installing OSX, disk repairs, permission repairs and an appointment to Apple Genius Bar, I found the cause and the solution of the problem. So I first did a clean install to see everything works fine, and that went well. Password box works seamless. Then I started installing my usual apps one by one. I installed Airfoil but then if I want to watch an AVI movie on it's video player it has problems, I looked on their manual and they say I should install Perian (QT component). So I did, once I install that it asks me for my account password, which is normal. But then it starts to make the text invisible. So basically the source is Perian.
So what I did next was to leave Perian installed, and do another Snow Leopard install but this time archive and install. What it does is, it takes your account to the side, re-installs the operating system clean and errorless. Now I have Perian installed, can watch AVI movies, and password box text is not invisible.
This was the weirdest bug I've ever seen. Thanks for all your help.