Performing an upgrade will not wipe out the files that are currently on your hard drive (based on experiences with RH7.0 to 7.1, and 7.1 to 7.2), but you're right, a backup would be nice.
Sounds like you tried to upgrade your kernel via rpm. Is that right? Or did you delete the old kernel before you tried the new one out? MY personal preference is to not use rpm, since it makes the kernel upgrade and removes the old one. Then you have no safety net if the new one doesn't work right. So compile it from source.
Can I use the RH installation CD to make an "upgrade" and thereby get a correctly configured system?
That's a loaded question. Depends on if it was configured correctly to begin with. But it may get you back on track.