I'm thinking of being a 'rogue' style of character, with sneak, 1h, light armor, illusion, archery, smithing. I have heard that this could be overpowered because of the huge dagger multiplier. Will I be OP, or only if I power-level it? If so should I just use swords instead of daggers?

You will be OP once you get the backstab perk and other sneak perks.