|Desktop context menu|
When you double click the file, windows will open the Data Link Properties dialog which will let you test your connection information:
|Data Link Properties dialog|
One thing that trips people up regularly, you can only use the username and password fields to pass in SQL credentials. They won't work for domain credentials since it is not using impersonation, just passing credentials. If you need to test as another user, open a command prompt as that user and 'run' the UDL file as that user by just typing it's name (and path if you aren't in the same directory) in and hitting return. That should launch it as that user and let you test using Windows NT Integrated security as them.
Have fun, and keep coding!