While zacsmaster is essentially correct in saying that 'The higher the resoloution, the better', in that higher resolutions look better quality, it should be pointed out that higher resolution displays take up more memory and processing power and can slow your computer down on older computers.
If your screen takes a few seconds or more to properly update, e.g. if you are switching between Internet Explorer and the desktop, then you should change to the next lower resolution. Having said that, if your computer has a decent graphics card like you said it has, then there should be no problem.
To find the best setting you should first get rid of any wallpaper photos and see which resolution you are most comfortable with (i.e. are you straining to to look at the screen and read desktop icon descriptions etc.). Whatever YOU FEEL IS BEST is the correct screen resolution - don't be worried about experimenting with all the offered setting as it is impossible for you to damage anything and you can always change it back.
With regard to wallpaper photos, any picture at a lower resolution than your desktop settings is likely to look dodgy. 640x480 is almost certainly unsuitable on a widescreen monitor, but there most be hundreds of free images of trains you can find by going through Google.