most secure directory level?

Hello, I am new to all of this although I have installed Gallery2 and Joomla, then removed them. I have installed something like WP once although I am no expert at this yet. What I learned with Gallery2 is I could install the password file in the level above my public html access page. It appears that WP is asking me to install my passwords for my db in the clear. Am I Missing something here? Am I just not understanding what is happening or can someone please tell me how to install like I have with Gallery2, with the db access file in a higher and therefore more secure directory level?

Much thanks.