It means that you can show proficiency in a subject by doing a test, for example, let’s say you decide to study languages abroad, and you go to England, one of the clases that you should take is Chinese, well, you can just do a test( test out) because you don’t need to go the entire semester to Chinese classes since you already speak the language

I disagree about "testing out" because you still have to fulfill a certain number of credit hours, you just start out at a higher level. For example, if your Major is a Foreign Language and it requires 16 Credit Hours and you test out of 1st and 2nd year of that language, you can start out at 3rd year of that language but you still have to fulfill 16 credit hours. That is 16 credit hours of that language unless the university does not have enough classes, instead they will have you take something else similar, like if your Major is Chinese, then they will require you to take the extra hours in Japanese or Chinese History or East Asian Religions, etc. You still have to complete the full number of "hours" required under your major. Some high schools have college AP classes that count as College credit hours, these are classes that are considered so high a level that they count towards college - but they are NOT easy classes, they are perhaps cheaper for the credit hours. The problem is, not all colleges will accept the AP class as credit, usually only local colleges will, another state's school probably will not.