With Mac OS X you actually have 3 options when installing - Upgrade, Archive and Install, and Erase and Install. Upgrade is the simplest but also the most prone to problems (usually caused by incompatible applications). Archive and Install is reasonably safe, and is a good option if you're concerned about post-install trouble. Your choice whether to enable "Preserve users and network settings" - this is very convenient for keeping your existing data but can occasionally lead to problems. An Erase and Install will wipe your hard disk clean before installing. This is the safest option, but also the hardest to get up and running afterwards, since you'll have to manually copy all the data you want to keep from your backup.
For things like the situation you describe I always do an Erase and Install, just because I'm paranoid 😱