I'm able to log in to MySQL and CRUD databases easily with PHPMyAdmin. 
WAMP on Windows makes sure of this.

I tried your command for creating a test rails app in cmd and created a 
new database. I still get the same error.

Like I mentioned in my original post, when I run ruby script/dbconsole 
it gives me an error that it cannot find mysql client. So I think the 
problem is beyond my database.yml config.
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