In NetSuite, there is a fixed set of custom field types (like Entity Custom Fields, Transaction Custom fields etc.). A Transaction custom field may apply to Sales orders and/or vendor credits for example. This filter is what determines whether a given custom field applies to a specific record type. Sometimes this filter is too aggressive.
The consequence of turning off this filter is that you will see (e.g.) all transaction fields under sales orders/vendor credits regardless of whether they apply to them or not. This is considered a minor issue because when you are building a template, you know which custom field you need and can find it by name on the list.