I seem to have discovered a way of clearing the contact pictures up if they appear distorted: Tap the name of the contact you wish to repair in the favorites (or your big contact list), then go to the bottom of their info and tap Edit (Edit contact) so that you can change their phone number, address etc. Next, tap the icon on the very most top left, it should be the photo you already selected, or the little camera icon if you have not yet set a photo for them. Tap 'Photos', select the photo and crop to your liking. Save the photo, then scroll down and make sure that you save the changes to your contact at the bottom! This should stop the pixelation, it seems as though there is a bug with using Photos app to 'set as' for a picture and the way it deals with resizing the picture to apply it to the contacts. It goes without saying that one should try to use a decent resolution image if you can help it, too. Hope this helps!