If you are in the United States, you can now use PayPal as a method of payment for the Xbox LIVE Marketplace.
You can use PayPal to buy Microsoft Points without having to associate your credit card information to your Xbox LIVE account. If you are new to PayPal, please sign up first and then follow the steps below to associate your account with Xbox LIVE.
It’s pretty easy and just like adding a credit card to your account. Sign in to Xbox.com and head to the account summary page. From there choose “Manage Payment Options” (from the left navigation menu) then click “Add a new PayPal Account.” Follow the instructions and you’ll be set up in no time.
A couple of things to point out:
PayPal is currently supported for Xbox LIVE users in the U.S. only.
PayPal can only be used to purchase Microsoft Points on Xbox.com.
PayPal accounts are not available for purchasing Microsoft Points on the Xbox 360 console.
You can associate multiple Pay Pal accounts with your Xbox LIVE account.