Whether you do an upgrade or an full install of Vista, you still need backups of any important data. In fact, you need that even if you aren't doing ANYTHING to your PC.
Personally, I've always had good luck with "upgrades". I've had systems (with gradually upgraded hard drives) that started with DOS and Windows 1.0 and were upgraded all the way to XP without any full re-installs. One of current PCs (with XP) still has a complete Windows 2.1 install on the hard drive, complete with some 1988-era Wndows Apps.
My current work XP Pro PC WAS a full re-install, but that was mostly because there were so many junk programs on the old PC that it seemed easier to start over than to try to decide which programs to keep and which to delete.
Note that I have NOT performed a Vista upgrade yet, so I have no idea how reliable the upgrade process is. As noted, you can't necessarily judge from experience with pre-release Vista versions.
Upgrades CAN go astray. I had one Win95 to Win98 that bombed out because of a failing CD drive and that made a pretty good mess of the disk. But I've done dozens of "Win98 to XP" and "Win2000 to XP" and most have had happy conclusions. As long as you make the MUST-HAVE backups, you can always try an upgrade and see how it works for you. If it works, you've saved a ton of time in re-installing all your applications. If it doesn't work, you can always wipe the drive and do the full install, with not much time lost.