A fresh install eliminates all of the debris that builds up in your system over time - things like not-really-uninstalled programs, service packs, file fragmentation, etc. The result is a system that runs like it's been going to the gym regularly as opposed to one that's flabby and overweight.
But it is a lot of work (kind of like going to the gym ;-) ). You can try the upgrade, it doesn't prevent you from going ahead and doing a clean install later.
BTW, you really should back up your data anyway. Disks can fail at any time, and my experience is that even folks who didn't think their data was all that important are often really upset to loose it all.
having a TB drive with no partition is suicidal. If you had 2 partition on it, then it would have been only a matter to move the thing you want to keep to the non system partition, format the system partition, install the new OS, then move back stuff if needed. And you should really have a back-up of what you cannot get back, like your own document, digital pictures or video movie.
I would get a new, smaller drive to either install the new OS on or backup your stuff. then better reorganize your TB drive
You can do a "custom install" (same thing as a fresh install, not upgrade) from Vista to 7 and all your files (mp3s, photos, documents, etc.) will be saved in a folder called Windows.old, but I would recommend that you backup your files on an external harddrive or DVDs just incase.
I went from Windows Vista 32 bit to Windows 7 64 bit. After I installed Windows 7, I moved all my files back into my Windows 7 account, reinstalled my programs, and then deleted the Windows.old folder.