Vault-backed dynamic credentials provide a secure method for managing HCP Terraform infrastructure by auto-generating and revoking secrets/credentials when they are no longer needed. This approach reduces the likelihood of secrets leakage and sprawl, as well as offers several advantages over using only dynamic provider credentials without Vault, such as consolidated management and auditing, no OIDC setup required in cloud providers, leveraging Vault secrets engine configurations, and protected inbound access. By adopting HashiCorp Vault as a secrets manager, users can store their secrets securely and centrally, eliminating the need to hardcode them within Terraform configurations.