Microsoft Points are the official currency of the Xbox Live Marketplace. This points are used to purchase downloadable items like Xbox 360 games, game maps, game add-ons, avatar customization, movies, themes and music.
This allows users, even without their credit cards, purchase valuable goods from the marketplace. One of the biggest advantage from using Microsoft Points is users can avoid the additional fees they have to pay for using their credit card.
There are free downloadable products from the Xbox Live Marketplace, but mostly the premium goods like full game versions are not free, you have to purchase them using Microsoft Points.