"I haven't found a better way to credit a QB invoice when a customer pays this way,"
You use Receive Payment, the same as always. You would be tracking your PayPal account as a Bank type, if they paid to your PP account. If they paid Through their PP to your Bank, you would let this post to your Checking account, directly.
If you have a PP account and they paid to your account, you need to be managing this as if that is a Real Bank, because it is a real bank = they have your funds, you get statements, you Reconcile that account, and you Transfer money to/from PayPal and from/to Checking.
The transfer from PP to checking is not income, again.
"so I created a credit memo for the amount of the invoice and applied the existing credit to it."
The problem here is that what you used on the Credit Memo is flowing the data to your accounting, and you just Reversed that sale. Credit Memo = Reversal of the Invoice.