What should I do about this ebay problem??: I bought an item from a seller using bill me later.....?

If the transaction was cancelled, the amount paid should have been returned to your PayPal account. Bill Me Later is a PayPal service, the seller couldn't have done anything with that. Was there money in your PayPal that you *should* have immediately paid on the Bill Me Later account? If the seller cancelled the transaction and the money was refunded to your PayPal, this is your fault. And yes it sure as hell will damage your credit if you don't pay it, it is no different than a credit card.