When on, editing keys in Track View updates the viewports with any changes that affect the current frame while your mouse button is down. When off, the viewports are updated only after you release the mouse button. Default=Off.
For example, if you're at frame 10 and there are position keys at frame 0, 20, 30, and 50, then editing either a key at frame 0 or 20 with Interactive Update on potentially lets you see the changes in the viewport as you drag the key. However, editing a key at frame 50 is unlikely to cause a position change at the current frame, so you won't see any difference with Interactive Update on or off.
To view the results of editing keys anywhere in Track View in real time, use instead. Turning on Sync Cursor Time automatically turns on Interactive Update as well, so you can see all changes interactively.
In some circumstances, simply playing back an animation or dragging the time slider with Track View open, without editing keys, can cause performance issues. If you experience this, and Interactive Update is on, turn it off to improve playback performance.