That makes sense. I can keep my giant circle for terrain collision and use other shapes (likely rectangles) for damage hit detection.
Still, how do you suppose I should handle actor-actor (no-damage) collision? I'd like to keep it based on circles to make actors sliding around each other easier. I'd like to size the circle such that I get some overlap between actors but not too much overlap. But I don't want a situation where an actor can't attack another actor because their movement collision circles spaces them such that one can't reach the other's damage rectangle with its attack.
If that's an issue, make smaller circles. You don't want to get too technically complicated, especially for a simpler game like this.
I mean, realistically, your current circle size should never run into "one can't reach the other's damage rectangle with their attack". All attacks in a fighting game with tiny sprites like this should pretty much reach at least 3/4 of a body diameter outwards. If your attacks don't reach that far, you're doing it wrong in terms of poses/anatomy. If this guy throws any punch, kick, or grab, or swings a weapon, it'll reach that far. Please don't give me any gruff about how real martial-artists keep their back straight or yada-yada; I know what I'm talking about, and I've animated hundreds [lit.] of weapon-swings for a videogame. You don't need to go all looney-tunes on stuff, but your motions do need to "project" and be visible.
As for actor-actor collision; what we did in frogatto was that all characters' solidity was such that no two things can occupy the same space. They have a rectangle, and these rectangles both can't cross the terrain, and can't cross each other.
We made two additional nuances - nothing can cross terrain, but for characters and such, we came up with an idea of "solid dimensions", so that players can pass through NPCs; objects only collide with other objects in their same dimension (although objects can be in multiple dimensions). Also, to make slopes work nicely, our objects actually aren't done with rectangles, they're done with sort of an inverted "house" shape, with the bottom corners cut off; thus they'll fit perfectly on a 45° slope. Naturally, this means we can't do >45° slopes, but those would be a tad awkward anyways, and we can get most of their aesthetic effect with a staggered mix of vertical and 45° wall sections.