Merit (Pali: puñña) is that which accumulates as a result of good deeds, acts, or thoughts and which carries over to throughout the life or the subsequent incarnations. Such merit contributes to a person’s growth towards spiritual liberation. (Definition from Wikipedia)
Someone once asked Ven. H. Gunaratana what merit meant, and he replied that you can substitute the word “joy” where you see the word merit. So the concept is more fluid than the storing up of “good-behavior points”.
Thanissaro Bhikkhu has prepared a study guide to the subject of merit and how it is understood in the teachings of the Buddha. He selects relevant suttas (which we’ll look at), and also wrote an important introduction to the subject.
Here’s the first section of the introduction, from http://www.accesstoinsight.org/lib/study/merit.html
Of all the concepts central to Buddhism, merit (puñña) is one of the least known and least appreciated in the West. This is perhaps because the pursuit of merit seems to be a lowly practice, focused on getting and “selfing,” whereas higher Buddhist practice focuses on letting go, particularly of any sense of self. Because we in the West often feel pressed for time, we don’t want to waste our time on lowly practices, and instead want to go straight to the higher levels. Yet the Buddha repeatedly warns that the higher levels cannot be practiced in a stable manner unless they develop on a strong foundation. The pursuit of merit provides that foundation. To paraphrase a modern Buddhist psychologist, one cannot wisely let go of one’s sense of self until one has developed a wise sense of self. The pursuit of merit is the Buddhist way to develop a wise sense of self.
The following readings show how this is done. They begin with a section on basic wisdom, which shows how the questions that lead ultimately to the wisdom of letting go first focus on things to hold onto: the skillful traits that, on the beginning level, provide a secure place to stand while letting go of character traits that are obviously harmful. Buddhist wisdom famously focuses in the characteristics of inconstancy, stress, and not-self, but the application of that wisdom grows out of the pursuit of what is relatively constant and pleasant, and requires a mature sense of self: able to plan for the future, to sacrifice short-term happiness for long-term happiness, to consider the needs of others, and to develop a strong sense of self-reliance in the pursuit of a happiness that is wise, pure, and compassionate.
The section on merit then sets out in general terms the types of meritorious activities that conduce to that happiness, focusing primarily on three: giving, virtue, and meditation. The next three sections focus on the ways in which each of these activities can be pursued so as to produce the most happiness. For instance, the section on giving discusses how the happiness of generosity can be maximized by wisely choosing the proper motivation for giving a gift, a proper gift, and a proper recipient for one’s gift. The section on virtue shows how to learn from one’s past mistakes without succumbing to debilitating feelings of guilt. The section on meditation discusses not only how the development of good will — the meditative practice most often cited in conjunction with merit — can lead to happiness both now and in the future, but also how it can help minimize the bad results of one’s past unwise actions.