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echo $TERM gives me xterm-color. Is that right? I'm having issues with vim and was told to change it to dtterm. Why?

I've learned that I can change this value in Terminal.app Preferences... under the Advanced tab: Declare terminal as:

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Only the person who told you that can answer why. When it comes to setting $TERM there's a lot of paranoia and misinformation around. Ideally, $TERM should always be set to a value that is correct for whatever terminal emulator you're using. Only occasionally is there a reason to select a variation, to disable or modify specific features, e.g., xterm vs. xterm1. Rarely, it's sometimes necessary to customize the value to work around a problem, usually with a program that either has a bug or isn't configurable enough. – Chris Page Aug 29 '11 at 12:23
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Yes, xterm-color is the default for Terminal.app; it's the most compatible with, well, everything. You can see when you open the preferences window for the terminal:

Terminal Dialog

You can change it to dtterm in the menu:

Terminal Dialog

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