Tags are the free-form labels on your contacts. You create a tag simply by applying it to a contact; this page is where you manage every tag across all contacts at once - rename them, merge duplicates, or remove one everywhere it is used.
Open Settings and choose Tags.

Each tag shows how many contacts carry it. Use New tag to create one up front, the search box to find a tag, the pencil to rename it, and the bin to remove it from every contact. Select two or more with the checkboxes to merge them, so your segments stay clean.