Date: 2010-09-19 06:12 am (UTC)
The text gets grainy because of how JPEG images work (bunch of colored square pixels make the image, and making the image bigger basically just replicates those colors and groups them into giant squares to keep the pixels' original proportions).

If you're using Photoshop, you can cover up the original text with the background color and insert a new text layer so you can type out the caption yourself. That way you can resize the text without having to worry about pixelation, since Photoshop will render the text cleanly at whatever size you decide. If you're using paint, I'd still cover up the original text, but make sure that if you resize the retyping that you change the font-size value yourself instead of drag-resizing. I haven't used paint in a while, but I believe drag-resizing text makes paint treat the text like a pixeled image.
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