Conventional financial wisdom says that a credit card, like money, is the root of all evil. However, when used wisely, credit cards can produce a number of surprising benefits.

People who perform construction projects use power tools for a reason: Despite the risk of serious injury, they know that the tools can produce tremendous results. To manage the risk, they take the time to learn how to use them correctly, and then they abide by the rules when they're working.

Credit cards may be the power tools of the financial world. If used correctly, they can yield enormous benefits. If misused, they can produce some serious harm. Here are four reasons why these power tools can help you:

1. Rewarding the disciplined

Most credit cards offer some type of rewards program. From discounts on airplane tickets to cash back on every purchase, programs are tailored to meet a variety of different preferences. To take advantage of a rewards program, make all your daily purchases with your credit card. The catch is to pay off your monthly balance. If you maintain a balance at all, the rewards are quickly negated.

2. A quick fix when you're in a crunch

If your finances are in good shape, you'll get a generous line of credit with your account. This can be helpful if you're ever in a financial situation where you need quick access to cash, and don't have the luxury of a home equity line of credit. Whether you're counting on a credit card as an emergency source of funds, or as a simple solution when there isn't an ATM in sight, your plastic can come through big time in a pinch.

3. Elect to protect

More and more credit card companies now offer payment protection as a fringe benefit with their card. In addition, the Fair Credit Billing Act mandates that if you buy damaged material with a credit card, you don't have to pay for the purchase. This is particularly helpful when buying things online.

4. In their good graces

Unlike a debit card, in which cash is immediately deducted from your account after a purchase, a month's worth of purchases will accumulate on your credit card before you're billed. This is the equivalent of a short-term loan. It provides you with flexibility, especially for big-ticket purchases. Suppose you're planning to buy a new furnace, but you can't pull the trigger until your tax rebate arrives. By paying for the furnace with your credit card, you won't have to pay for it until you get your credit card bill. By then, your rebate check will be waiting in your mailbox.

Credit cards are the power tools of the financial world. Before you pick up the plastic, however, be sure that you understand all the potential harm they can cause. If you avoid the temptation of overspending, and pay off those balances every month, your credit card will be a powerful financial ally.

Published on May 10, 2008