A factory data reset (aka hard reset) will clear out two things in addition to user data and your installed apps - the operating system cache and the Dalvik cache.
We typically recommend doing it on major OTA updates (or whenever your phone gets squirrelly for no apparent reason) because just like when your browser gets all wonky, clearing cache cures many ills. Caches are great, they help keep things running faster and smoother, but once they get tangled, all heck breaks loose. (I once cured my voice search launching my keyboard in Spanish just with a factory data reset - when I say squirrelly, I really mean it.
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And for whatever reason, the carriers/makers don't include the cache-clearing commands on their OTAs, something that many of us have complained about for several years here. Experienced rooters know to clear those caches as a matter of course when installing rom changes, but it's a open secret kept from the non-root community. It's also the first thing that Sprint will do when you take a phone in with bug complaints - and now you know why.
Best practices -
Begin by ensuring that your contacts and calendar events are sync'd on the Google web so you don't lose anything. You can make just a user-installed-app backup with EStrongs File Explorer, but if you don't mind spending a few bucks and saving a lot of time and grief, use MyBackup Pro to save your apps and most of your data. I would especially recommend MyBackup Pro in the event that you've moved apps to your sd card. Try SMS Backup + or similar to save SMS messages you care about.
Once ready, do the reset and if this version of your firmward has a place there to also erase or format your sd card, skip that - there's nothing on your sd card needing erasing. If in doubt about this whole process, go ahead and back up your sd card to your PC - that never hurts, always a good idea, those things don't last forever either.
You will have to set up your home screens and accounts/passwords when you're done, so there is a minor nuisance there.
Hope this makes sense and helps!
PS - a big set of SMS messages can certainly lag your phone, so think twice before restoring year-old messages you don't care about there.
