They become better when you level up, but do they become better if you put more theif skill points into it? or does it just increase the success rate?

I beleive it only increases difficulty in the harder dungeons, your skill points affect what level of difficulty of traps you can find, and remove.. 100% will allow you to find traps everytime (mostly) and disarm all traps (mostly) The exceptions are certain magical traps that you might not be able to find, or disarm..

Skill points put into set traps have nothing to do with the damage that a trap does. The points only go toward the sucess or failure of setting them.