A Dremel or similar rotary cutting tool can be very useful for cutting, filing or doing other intricate work for which other related tools are not suited. For that reason, it is perfectly understandable that you might wonder if it would be good to use for cutting stencils. Unless you are cutting them out of paper or cardboard, the answer is yes.
Using a Template
It may seem a bit counterintuitive to use what is effectively a stencil to cut out a stencil. But to make sure that you get exactly the results for which you are hoping, you should draw your design to scale on a piece of paper. Carefully tape it to the surface of the metal or plastic from which you intend to cut your stencil, using low-tack tape that will not leave a lot of adhesive residue behind when you peel it back. After you have done this, you will be ready to actually cut out your stencil.
Cutting Intricate Designs
It may seem simple, but a circle can be a very difficult thing to get right. If you have a hole saw, you might consider doing it that way. However, it is possible to do with a Dremel if you are careful. Using the appropriate cutting wheel for the material you are cutting, make sure the wheel is at a 45-degree angle to the surface to be cut. Be patient and go around and around with the wheel. Do not force it or you will wear the cutting wheel down prematurely. Instead, let the wheel do the hard work of cutting all by itself. Eventually, the material you are cutting will wear through.
To cut very intricate designs, such as whirls and loops or eyes and mouths of animated characters, you simply need to make sure your paper template is accurate to what you want to accomplish. Next, use an engraving bit in your Dremel to carve out the design according to your paper template. This will ensure that when you use the cutting wheel to actually cut out the material, it will be more likely to stay and cut exactly where you want it to cut.
If you have some slightly worn cutting wheels that are a little smaller than they are new, you will have an easier time getting into those nooks and crevices with your Dremel. Using the lesson learned from cutting a circle, hold your cutting wheel at a 45-degree angle to the material to be cut. It should be fairly simple to cut, since you used the engraving bit beforehand. Be patient and let your cutting wheel do the work; do not force it.
After you have cut out your basic design, you will have some rough edges. For this reason, it is important to have some metal hand files or rasps on hand to smooth out those edges and put a nice finish on your completed stencils. For a start, you will want to at least have a flat file and a round file on hand, and you may wish to have them in different grit grades, as well. As you do more of this work, you will learn what styles and types of files you prefer for which tasks.