Your drive may be USB3, but the connection on the computer is USB2, and USB2 is not fast enough to play ProRes HQ, nor any flavor of ProRes. It's not a good connection for video playback. You need at least a Firewire 800 connection in order to play back that footage on that computer.
"I'm going to have to use H.264 on the timeline, it's the only format that plays back contrary to the fact!! "
I highly recommend NOT doing that. FCP has serious issues with H.264, mainly being sync. If you don't have issues when you edit, you'll have issues when you export. H.264 is NOT a codec FCP 7 works with.
"The only thing is I have to render every single clip then re-render if I make any trims or edits. After that though it plays perfect in the canvas."
When the clip settings are different than the sequence settings, this is the result. BUT, don't make H.264 sequence settings...convert the footage to ProRes 422 (not HQ, larger file sizes for zero difference over ProRes 422. HQ is meant for high end camera conversions, Red, Alexa, etc).
"This is going to be a long, painful edit looks like"
Then don't do it. It'll be very painful because it is the absolute wrong thing to do.
"Should I just drag and use my native .MP4 files from the camera? They seemed to be working fine before but things started getting choppy too."
No. FCP 7 doesn't work with MP4 files either. That's just a different container for the H.264 codec. FCP craves FCP codecs. ProRes. You just need a different drive.
"There are many Sequence Settings to elaborate on, anything specific? General tab, Video Processing, Timeline Options, Render Control?"
CODEC...or rater, COMPRESSOR. The sequence settings must match the clip settings exactly. To do this, make a new sequence, add a clip (ProRes) and when it asks "do you want to change the settings to match," click YES.
