What is the use of Folders in GTM?

Use of folders in practice is up to the individual or organization, and can vary greatly between installations. Some examples of how users might set this up include:
Organize by project: Create a folder for a new microsite, or for a new ad campaign.
Organize tag by team: Create a folder for an agency to work in.
Organize tags by type: Create a folder for Google Analytics tags, another for AdWords, another for 3rd party tags, and another for custom HTML tags.

Create folders to organize tags and triggers. Use GTM's workspace folders to categorize your tracking pixels.

It is used to categorize individual items, so it should dramatically reduce clutter

Folders can help you organize a container's tags, triggers, and variables into logical groups that can help make your Tag Manager configurations easier to manage. Folders can be used to organize your content in several ways: Organize by project: Create a folder for a new microsite, or for a new ad campaign.