To configure AWS credentials, you create a file named 'credentials' in the '.aws' folder in your home directory. This file holds your access key ID and secret access key under a profile name, usually 'default'. When you run AWS CLI commands or use AWS SDKs, they read this file to authenticate your requests. The process starts by creating the file, adding your keys, saving it, and then using AWS tools that load these credentials to access AWS services. If the credentials are missing or incorrect, authentication fails. You can also manage multiple profiles by adding sections with different names in the credentials file.