Anchor text is the text used in a link, for SEO it’s important that links contain relevant anchor text to the page it links to. For example
Click here to see our products range.
In that example “here” means nothing to the search engines. Optimised version would be:
View our products range.
Now the link is meaningful so the search engines will understand that the page at the other end of the link is the products page.
This method should apply to internal and external links. However, the over optimisation of internal links can lead to penalties – for example building too many external links using the same anchor text.