What you want to do is buy a detailing pen
http://www.newmantools.com/preppen.htm
http://www.handsontools.com/store/pr...Pen_15462.html
Use this to sand out the rust and you want to taper the edges of the paint chip so they are like \__/ Instead of |__| (Trust me on this one).
If you wan't an okay job, clean the chip with rubbing alcohol then paint...... if you want a long lasting flawless invisible job, keep reading.
Next use a little bit of rust killer or equivelant to neutralize any rust. Clean the chip with rubbing alcahol and a q-tip. Then you want to apply some rust stopping primer ........ here is the trick.
NEVER use the brush that comes with the paint or primer.... if you glob on the paint it will take months to dry and to shrink. If you use small coats, it will dry and harden within days. You can buy a detailing brush or use a tooth pick but there is a cheaper and way better solution. I have tried everything and this works the best....... get yourself a book of paper matches (like at a restauraunt) and tear out a match. The fuzzy end is the PERFECT touch up brush. If it is too big for the rock chip, cut it at an angle cutting the fuzzy tip in half or less.
Put on a thin coat of primer but make sure you get all of the bare metal but none on the surrounding paint (outside the chip or sanded area). Let this dry for at least an hour and a half and then apply paint (with the matchstick). You want to put on thin layers letting each one dry for about an hour until the paint buldges above the origonal paint (you will see why in the next step).
Let the chips cure for 2 wks (to make sure the paint is dry and done shrinking), and then soak some 1500-2000 grit sand paper over night. Use the sand paper on a flat block to lightly wet-sand the paint buldge until it is flush with the old paint surface (don't worry if you marr the old clear coat a bit as this will come out in the next step, but try not to if you can). If after 2 wks the paint has shrunk below the origonal paint surface, clean it with rubbing alcohol, rough up the new paint with the detail pen, clean again with alcohol and add more paint. Wait 2 days and you should be good to sand and finish.
Once done, use some Meguiars Swirl Remover 2.0 to take out the sanding marks and you will not be able to see that there was ever a chip. With such a small area, you can do this by hand. After all this, it is very unlikely the rust will come back.
These steps work great. Here is what I did and I have no paint chips. Follow all the steps above....... then rear end someone. You will have a flawless paint job
Note: if the chip wasn't down to metal, skip the primer and just clean with rubbing alcahol.
All of the supplies can be bought at any auto parts stores, restauraunts

or even walmart has them.
Here is a link (even uses my matchstick trick). I have left out some small steps (like washing the car first), but I have found using the products and time limits that I have mentioned gives the best results.
http://www.web-cars.com/detail/touchup.php
There are better pages out there, but of course I can't find them right now.
K, I think I am done babbling....