I've never gotten any damaged games from Gamefly but I've gotten damaged/incorrect discs through Netflix a lot of times. Doesn't bother me too much though, they're really good with fixing the problem for you. Usually I get the replacement disc the very next day before even mailing the bad one back.

I've never done the Keep It thing on Gamefly, but it's definitely cheaper than buying used from a store. I have New Super Mario Bros. right now and the keep it price is something around $20. When I had Super Paper Mario the week it came out, the keep it price for that was $35, which I was very tempted to pay considering I was most likely the first person with that copy ANYWAY and that's $15 cheaper than I could've possibly gotten it anywhere.