You've described the best method anyone has going, with one difference. With plants as young as those the roots may untangle themselves with gentle swishing - no toothpick needed.
When you move them to larger containers, use seed-starting mix, as they're still too young for full-up potting soil. Potting soil has fertilizer mixed in, and that can burn your babies. One of two things I wonder about his how yellow the leaves appear - are they that yellow in person or is it just the pic? If it's just the pic, no problem, but if they're that yellow likely you are keeping them too wet. Along the same lines, the second thing I wonder is about the brown cast to the top of the pellet. If you didn't somehow put that there (like by using some fertilizer) then it's likely the start of fungus - also a sign that they're too wet, and also a sign that you should remove them from the pellet a.s.a.p.
When you repot them make sure to start with damp soil. Use something long and somewhat narrow to dig a hole into the soil - a chopstick is a good size for this as you can just push it down then stir a bit to widen the hole just a tad. You'll want to dig down at least as deep as the roots are - you need to attempt to put the roots in without getting them bunched/knotted up. Still tamp the soil down once they're in. If you get a fan on them that will help dry out the soil surface, which will help prevent fungus from growing. Since you haven't had a fan on them before, make sure it's gentle to start with - use reflection if you don't have an oscillating fan with a slow setting. Once they acclimate to the breeze you can up the speed.