Running MySQL's 'source' Command

I am having failures processing the following command and I wonder
if you can tell me what I must do in order to have success. When I try
to run source mysql_dump.sql.txt ==> it is a problem for me.

1) I put the file in /home/mlh/public_html/credifree/sql_script/.
2) I made that directory my current directory
3) I typed mysql and pressed ENTER
4) I then typed source mysql_dump.sql.txt and pressed ENTER

A bunch of error messages saying
ERROR 1046: No Database Selected
filled up the screen.

Well, of course there was no database selected. I do not yet have a
database. I thought the whole point of running
source mysql_dump.sql.txt
was to CREATE a set of database files on my linux box. Is that
incorrect? What must I do to avoid this error 1046?

And now, the last question...
Can you tell me where the database files will be placed when running
source mysql_dump.sql.txt as I described above from the same current
directory as described above? I do wish to KNOW in advance where the
files will be created.