FAT32 is generally considered to be a safer, more flexible system than FAT16. The biggest disadvantage is that once you convert to 32 with the Windows 98 utility, you cannot go back to 16 - unless you buy PowerQuest's Partition Magic. But there is almost no reason why you would want to go back. As a matter of fact, I would recommend that you use Partition Magic to convert your drive because it can convert drives that have bad clusters. Windows 98 won't.
Bad clusters are flawed spaces on the drive.
They are ubiquitous and, at the same time, rarely have an impact on a computer user's life. Computer users who still have early versions of disk maintenance utilities such as Norton Utilities will have to upgrade their programs to work with FAT32. The biggest step you have to take before converting is to back up your data. In 99 percent of the cases the conversion goes flawlessly, but still you should back up your data safely, just in case. And, yes, go for it now.