In case it wasn’t obvious, DNS leak just means that Mullvad has detected that your DNS servers are not ones belonging to Mullvad, meaning that when you navigate to a website, the request for where to find that website is being sent to a third party outside Mullvad, introducing the risk that while Mullvad isn’t logging your network requests, this third party might be.
Unless you have a very specific reason not to (such as wanting highly-configurable content blocking with NextDNS instead of the basic options that Mullvad provides), you should generally use your VPN’s DNS servers while connected to the VPN. That way, you only have to trust one company (your VPN provider) with your internet traffic, as opposed to them and a separate DNS provider.
In addition to increasing the number of parties you have to trust with your internet traffic, what Mullvad’s connection check demonstrates is that websites can see that your DNS servers are not the ones associated with your VPN, so websites could attempt to single you out as a Mullvad user with Cloudflare DNS rather than simply being another Mullvad user, adding a data point that they could use to re-identify you across browsing sessions.
It’s likely not an imminent danger as websites would have to be specifically looking for this discrepancy and in most configurations, Cloudflare themselves are probably receiving your VPN IP as the only piece of identifying information they could associate with your requests should they choose to do so, but in most cases you’re still better off just using your VPN’s DNS servers due to the above risks.