When editing or adding a new selection item or Spec/Selection template item, use the "Edit categories" option above the category drop down list to add, delete, or rename selection categories.
If you are deleting categories, you will be asked to reassign any selection items that are currently in that deleted category so that they will still be organized under one of your other categories.
It's also important to note that none of your changes are finalized until you click "Save". So, you can add, delete, or rename categories to your heart's content and then use the "Cancel" button to revert the changes if things get too messy.
If this is a selection item on an individual project, any changes that you make when you save will affect the categories on this project.
If you are editing an item on the Spec/Selection template item, on the other hand, editing the categories will alter the categories in all Spec/Selection templates as well as the starting list of categories for any new projects you add.