what are the best tools....

I'm glad you asked this.  I don't have the answer but I'm building a BuCue that would be hit with lots of sand so I'm gonna be watching for this answer too. 

Edit: Actually I just thought of something.  http://www.gamerabaenre.com/toolsandtechs.htm

On his tutorials page the two weathering tutorials will show you how to do everything from beam blasts to bullet holes.  I've studied his tutorials in prep for damaging for the first time later this summer. 

I used my Dremel with a engraving bit to simulate artillery-like impacts on a shield once. 

If you thin the plastic from behind, you can tear it up with an xacto blade to simulate torn metal. 

And a salt mask will create a very nice wear and tear look. 

That's another good one, although I think he overdoes it a bit for the scale represented. I've used similar techniques on my 1/20 scale kits tho'.

Opinions will vary, of course.

above mentioned will give you enough explanation to start...

Here are the example of bullet damage as well as chipping~

damage

chipping