A text editor (NotePad, for example) just edits text, no special features. A word processor (WordPad, for example), on the other hand, offers a number of features for text manipulation besides simple editing. These features include font selection and sizing inside a document; the ability to modify text to be bold, italicized, underlined, or colored; indenting and formatting options, adding graphics or other page decorations; and so on.
There are fancy text editors with extra features (EditPadPro comes to mind), but they still (usually) only output plain text. Word processors like the free AbiWord or OpenOffice.org can be used to create or edit simple ("flat") text files, but it's overkill.
I often create a text-file in a text editor, then load it into a word processor to "pretty it up"--conversely, when I copy-and-paste from a word-processor DOC- or RTF-file, I often paste it into a text editor first to strip out any fancy text formatting that might get in the way--in fact, I always keep an instance of a text editor open for quick notes or a copy-and-paste repository.
~~ ScienceMikey