Well, for my trick to work, you have to have the picture to be drawn in rather high resolution. Like, 1024x1024, and then you use the magic wand to cut away the background. Now you shrink the image down to 256x256, and what this does is get rid of the nasty white lines left behind by the magic wand, and now you won't have ANY at all. Also, the higher the resolution is when you draw it, the more the lines will go away when you shrink it down after you cut the picture. So, if you want it absolutely perfect, then draw it in 2048x2048, use the magic wand, shrink down to 256x256.. Do this, and it will be absolutely perfect in-game.
A way to know ahead of time if you have lines before you go trying it in game, is to make a Black layer under your image, and then you can see if the lines are there or not.
By the screenshot, it looks like you have it working well now anyway. So, just remember what you did.
Attached is a tutorial I made up to show you how I am doing this. I'll use a face I am going to make up really quick, so don't expect it to be anything fancy, it's just for tutorial purposes.
Here is the link to my tutorial:
Edit: Tutorial now removed, because it was only meant for Skele.
If anyone thinks this is a good tutorial, please let me know, and I'll consider posting it, as it may come of use to some people who are new to the decal/avatar making world. The reason I know how to do this, is because I used to make transparent avatars in the past, and it's important to have them perfect, or you'll be made fun of on forums you use them on.