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I have iPhone 5 and iOS 6.0.1 updated. Device prompts for password even while updating the apps. What is wrong with the device? Am I missing any settings?

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That is indeed interesting. Especially in light of this –  bassplayer7 Dec 11 '12 at 2:19
    
Did you ever update apps on the device before? Maybe your password changed? –  Gerry Dec 11 '12 at 8:20
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2 Answers

Try disabling your restrictions. Go to General, then scroll down to Restictions and type in your password. Select disable and try to update apps again.

If this doesn't work, confirm that the apps are connected to the same iTunes account used in the device in Settings.

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I just upgraded my password to the new Apple standards and than the password prompt stopped popping up

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Where did you do the password change/update, on the iPhone or in iTunes on your computer? –  patrix Dec 11 '12 at 19:32
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