I believe the backpack increases your carry limit by +4. So if you had a squad with one survivor he could now hold up to 8 cards. The backpack card should have a plus number on the face indicating the bonus carry limit. This would allow you to carry additional food, items, or armory cards I believe.
Exactly! As for what you can hold, you may have your survivor's hand limit (4) or with backpack (8) be whatever you like. They can only wield 1 weapon at a time however... unless they have a duel wield weapon.