Collation refers to the order used to sort the letters, numbers, and symbols of a given character set. For example, because WordPress, by default, uses the UTF-8 (utf8) character set, and when the WordPress MySQL database tables are created during the installation process, MySQL assigns utf8_general_ci collation to those tables. Beginning with Version 2.2, the collation (and character set) used by WordPress is defined in the wp-config.php file.

Reference http://codex.wordpress.org/Glossary