One of the first places people are likely to notice lag is on the home screen. If you scroll from page to page and are noticing frequent stuttering or freezing, that's a real problem. If you are running stock Android 2.2, or any version of HTC Sense, that animation should be smooth with just a little bit of bounce at the end. This is also a place in the UI where frustrating system hangs can happen. Does your phone become unresponsive for a few seconds when you go back to the home screen? It shouldn't.
Before taking further action, check to make sure one of you widgets isn't crashing. If an app is prone to failure, using its widget could cause some of these issues. Best to remove it from the home screen and contact the developer. Also be aware that the lag might be happening when an app is loading resources from the SD card. If that's the case, it could be the card having issues, not the phone.
Similarly, if you are getting a lot of Force Closes, a reset could fix matters. Since Android is a multitasking environment, app interactions are sometimes to blame. Two apps accessing the same system resource should be managed by the system, but if that's not working, Force Closes can result. Don't be too hasty to blame a single crashy app on the system as a whole. Consider contacting the developer before resetting your phone.
Speaking of apps, this is another place you can detect phone issues that could force a factory reset. Slow app launches and resumes heavily contribute to the feeling of a phone being sluggish. Take note of how long it is taking your phone to launch apps. If you are seeing longer and longer startup times, that could indicate a number of issues. Since Android 2.2, you should be seeing very little lag in launching apps. The JIT code compiler streamlines the process to a large degree. If your apps are taking longer and longer to start, something might be wrong with the JIT compiler.
Additionally, don't think you can ignore your battery life. Yes, Android is renowned for its for its, shall we say… dubious battery life. But if you are noticing excess battery drain, and can rule out a simple rogue app, it may be time for a reset. Watch your Battery Use information to see if anything is taking up a large slice of your power. This is usually found in Menu > Settings > About Phone > Battery Use. Take a look at the top result. You may see something unusual listed there at times when the battery is draining faster than normal. We have seen instances when the Android System listing shoots to the top for no reason. This often corresponds to a drop in battery life and odd systems hangs.
How to get a fresh startSo you decided to take the plunge, then? The act of erasing your phone is simple, but you should do a little preparation first. Decide if you want to backup your apps manually, or trust the Google Cloud to do it. Often, when you log into an Android phone, it will pull down all your system settings and apps automatically. If you are suspecting your apps are the cause, you might consider manually backing up the apps you are sure about, and deal with the rest on a case-by-case basis later.
If you feel your issues stem from a system error, or specific app configuration, you can let the Google cloud restore go ahead. Very few apps bring configuration data back with them on the other side, so you should be fine. To avoid having the apps restored automatically, just don't log in during the first start up when prompted to. Instead, proceed to the home screen, wait for the system to load, then add your Google account manually in the system settings. You can find out all you need to know about this process, along with more backup ideas, here.
If you let the Google cloud do the restore, it should be quick and painless. It's a bit more work if you go the manual route, but all your paid apps should stay in the Market list so you can find them. There is no set schedule for how often a phone may need to be reset. Many people likely won't get to the point that it's necessary. Although, we have noticed more stability and speed issues over time on phones running manufacturer modded versions of Android. Have you solved a laggy Android phone with a factory reset?