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Both categories and tags are used to arrange and label content on your blog. When the links are clicked people are taken to pages that have information only relevant to that category or tag. This is the best way to organise information on your blog so it is easy for people to find. Using tags and categories well is good for your SEO (search engine optimization).
If you think of a book – categories are like the Table of Contents and tags are the equivalent of the Index.
Categories are used to group related posts. For example, a category I might have is ‘Social Media’ which is a broad term and the tags will then be more specific – like Twitter, Pinterest or Facebook. If you came to my site and were looking for information about Social Media you can go to the category, but if you are looking for information specifically about Twitter you would click on the tag. Tags are like popular keywords that relate to your post. You can add as many tags as you like but you don’t really want to have more than 10 tags per post.
Best practice seems to be to only use one category per post, but use multiple tags. I do have some posts that are in more than one category, if it is very relevant, but mostly just have each post in one category. This post is in the category of WordPress, I could also assign it to blogging or even SEO (if I had such a category) but the one that is most relevant for it is WordPress.
The place to change/add categories and tags in the right hand column of the page where you write or edit a blog post. Here is an example of what that looks like.
You can use your categories as tags as well, but you wouldn’t have all of your tags as categories. Start off with only about 5 categories, as your blog develops you may then want to add some additional ones. If you have too many categories the chances are higher that someone will click on a category and you only have one or 2 posts there – which doesn’t look as good as having 10 or more posts there.
A point to note: if you are using the permalink structure www.domainname.com/category/postname and change your categories you will need to go back and update all the post or page URLs. I do not use this structure, I simply use www.domainname.com/postname.
Remember the purpose of categories and tags is to create a system that makes it very easy for someone to navigate your site. Always keep that in mind and don’t get too bogged down in how tags and categories relate to SEO.