The first thing to do, in my opinion, is to figure out if the bike is the right size for you. You think it might be too big, but it looks like a pretty small frame (from picture
#2 ). You might post a picture of the whole bike from the right hand side, and of you on the bike, in the Fitting Forum, along with an explanation of what is uncomfortable.
If you want to keep the bike, you can treat the rust and then protect the metal with clear nail polish or paint. Depending on how much you care about the cosmetics and how good you are at matching and applying paint.
If you want to sell the bike, I wouldn't bother to do anything about the rust and scratches. They don't affect the frame's integrity, they just make the frame a restoration project for the buyer. Hence, not worth too much, unless this is some very high end model which I can't tell. The previous owner badly devalued the bike by having it "custom painted", and any paint touchup you do is likely to be still quite noticeable. You might get the most money by parting the bike out, if you know enough to disassemble it without damaging anything. Hard to say without better pictures of the bike.
What did you end up doing with the Bianchi Krono?