The names you give the categories you’ve created provide rich keywords that attract search engines to your WordPress website. To get your site to rise to the top of search results, you'll want to make sure you understand the importance of search engine optimization (SEO).
A few services — Technorati being one of the biggest — treat categories in WordPress like tags. These services use those categories to classify recent blog posts on any given topic. The names you give your categories in WordPress can serve as topic tags for Technorati and similar services.
Search engines also see your categories as keywords that are relevant to the content on your site, so make sure that you're giving your categories names that are descriptive of your content.
If you sometimes blog about your favorite recipes, you can make it easier for search engines to find your recipes if you create categories specific to the recipes you're blogging about. Instead of having one Favorite Recipes category, you can create multiple category names that correspond to the types of recipes you blog about — Casserole Recipes, Dessert Recipes, Beef Recipes, and Chicken Recipes, for example.
Creating specific category titles not only helps search engines, but also helps your readers.
You can also consider having one category — Favorite Recipes — and creating subcategories (or child categories) that give a few more details on the types of recipes you’ve written about.
Categories use the custom permalink structure as well. So links to your WordPress categories also become keyword tools within your site to help the search engines — and ultimately, search engine users — find the content. Using custom permalinks gives you category page URLs that look something like this:
http://yourdomain.com/category/Category_Name
The Category_Name portion of that URL puts the keywords right into the hands of search engines.
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Source:http://www.dummies.com/how-to/content/how-to-use-wordpress-categories-to-attract-search-.html
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