My preferred settings are generally with the ratio being held using black bars, while being upscaled to my native resolution. In most cases I prefer a fairly uncommon filtering called "simple 2x". It basically multiplies the image by 2 using a nearest neighbor method, and then uses a bilinear filter after that for further upscaling. This is perfect for people who find that generic bilinear filterin (interpolated filtering) is just too blurry.
Here's Aria of Sorrow running with simple 2x, in a 3x window size:
Not too blurry but not too sharp, without distorting graphics.