It's all a matter of preference. Use what works for you. Since I have 1um scales, if working in metric, I display out to 1um. If working in imperial, I display tenths. Haven't found the number of digits confusing in practice. (6 digits is ok to work with, at least for me.) Since I'm using my own DRO encoder display software, I can display what's required, or truncate the digits, or display radius vs diameter. Currently using radius.
Using a 1um encoder on X allows roughly 0.0001" resolution on diameter, which is more than good enough for me. (1um on radius is 2um on diameter. 2um = 0.0000787") It's pretty rare for me to need to hit a diameter that tight. Even rarer to actually achieve it. I figure it is better to aim small and miss small, than the other way around. I'm not going for this level of precision often, as it's usually not warranted, but it's good to know that I have a way to measure this if needed.