This article is from the VW Technical FAQ, by with numerous contributions by Jan Vandenbrande others.
A: Supplied by (christopher.j.hapeman):
Pat Goss of Motorweek did a spot on this some time back,
there are many variations to this scheme, but the all follow the same
guidelines [Jan]:
Clean off the immediate area with rubbing alcohol. If there is rust
in the chip, glue a small piece of fine sandpaper to a pencil eraser
and rotate this in the chip until all of the rust is sanded off.
[Jan: I just fold either 220 or 400 grit sand paper and use the edge
to scrub the rust off. If I see pitting, I use Naval Jelly (Phosphoric
Acid) to reduce the remaining rust]
I think that he used a primer first and then the touch-up paint but I don't
recall that well.
[Jan: Primer is a good idea because it helps evening out the pit
that you created. I use Galvanizing primer, sold under different brands
such as Rustoleum. It's more rust resistant. After it dries I use
400 or higher grid sandpaper to level the primer out].
He used the end of a match (matchbook type (cardboard))
to apply the paint because the brush was usually too clumsy.
[Jan: Use what ever makes sense. QTips, small brushes, the end of a
bamboo BBQ squewer. For larger areas, I use a spray can directly,
after covering the stuff I don't want to paint.]
Fill the chip as much as possible letting the paint dry between coats
until it is flush with the old paint.
Let it all dry thoroughly and then polish the car (area).
 
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