When you select this option you are asked to sign into paypal once you go this you are asked to accept some T&C's and asked for a max monthly spending limit.
A link is then created between your GD and paypal account so when you purchase a product from GD and select the "PayPal® Account on file at GoDaddy.com" option at checkout the amount is paid automatically to GD by whatever payment method you specify in Paypal => profile => pre approved payments => edit funding source.
I use this method and have not had a problem. Can can change what card the payments come from at any time from the paypal site.