Use SEO URL's - How to get it working?

I am developing my site on a local machine before putting it live (testing it on http://Localhost/) and I am wanting to use SEO URL's.

So... I have switched on "Use SEO URL's" in the System >Settings, I have installed the apache module mod-rewrite and have renamed the htaccess.txt file to just .htaccess like the instructions state. I have then entered a SEO Keyword for a category (gifts) and a SEO Keyword for a product (TestProduct-123) but when I go into the store front and select either the category or the product the URL has not changed, it still reads as this for example...

http://localhost/IconCards/index.php?ro ... duct_id=52

Should this not be changed to be a SEO URL? Or have I missed something out?

Thanks for any help in advance!