I would fucking love it if I could put all my configs there, but unfortunately every other CLI tool seems to feel it needs a spot in the home dir instead..
It's used to store configuration files for various applications so they don't clutter up your home directory. For example, you can put your Emacs config files in ~/.config/emacs instead of ~/.emacs.d.
Not every program supports it though.
For number 2, is it hard-coded to ~/.config or does it read XDG_CONFIG_HOME? The latter is what it should do, so that the user has the flexibility to move all their configs elsewhere.