Dealing with rust on a steel frame
The best method for handling exterior frame rust depends on how much time you'd like to invest. The difference comes down to what you use to complete the two basic steps:


Remove the rust

Good: Sandpaper - Cheap, but wont remove all the rust, and may leave debris.
Better: Steel Wool - Will remove most of the rust, but may leave steel wool fragments, which can rust in turn.
Best: Brass Wool - Since brass will not 'rust' (oxidize) like steel, any fragments left behind won't cause the frame to rust.

Cover up the spot

Good: Nail or auto polish - Not technically the best sealant, also will wear faster and will need to be re-applied.
Better: Auto or spray paint, primer, or a clear lacquer - More water-tight, longer lasting.
Best: Bicycle paint - This is a given. =]



The most important point to note, though, is to remove as much of the rust as possible before painting. Simply painting over the rust will just seal it in, and allow it to continue rusting away beneath the layer of paint.