Wife has a cheesy 7speed FatBike. Her main complaint is poor shifting. I have an old XT derailleur and 8speed XT trigger shifter. Will the shifter work on her 7speed cassette if i set the stops on the derailleur to block off 8th gear on the shifter? Trying very much to upgrade low budget.

Probably all that she needs is a precise tune up including new cable housings and aligning the derailleur hanger.

There really isn't any difference between a 7-speed and an 8-speed derailleur so that'll work fine - provided the hanger and cable housing are right.

The shifter is another issue. 7-speed and 8-speed cassette spacing is just a skosh off so their respective shifters have a tiny difference in the amount of cable that they pull. Lots of guys say they've been successful in interchanging 7 & 8 speed parts but I've personally never been able to make them work to my satisfaction for very long at a time.

+1 New cable and housings properly installed and the derailleur correctly adjusted. The devil is often in the details.

There's a very small difference between Shimano 7sp and 8sp spacing (0.2mm according to Sheldon Brown) but in I've used many 7sp shifters with 8 - 1 cassetes and they worked OK. Play in rear derailleur is probably more than that.

Its a Shimano Tourney long cage derailleur, and a no-name twist grip shifter. All seems aligned and smooth just seems to be a lot of flex in the system. Very imprecise under any load at all.

I ran 8sp shifter and LX derailleur on my Mongoose 27+ and it was much better. After a couple weeks I spent $31 + shipping for an 8sp freewheel from Universal. The shifting was better than the limited-out 8 shifting 7. The main reason I got it was the stock 26T big cog made for a pretty steep low gear coupled with gigantic tires.

https://www.universalcycles.com/shopping/product_details.php?id=49867&category=1665

You can use the RD.

The shifter, however, perhaps. 7 and 8 speed shifters don't pull the same ammount of cable. They can be mixed, but not all the gears will work perfectly. They'll usually work well enough for most people, but not perfect.

So I'd use the RD, but keep the old shifter, changing cables, housing and tuning it properly (RD limit screws and B screw for start). Check the chain length, if it's too long, that can affect shifting.

Shifter compatibility with cable pull and things to pay attention to:
7) Bicycle rear shifter compatibility - Cycle Gremlin

Chain length sizing:
Chain length sizing for bicycles with derailleurs

Appreciate the replies, I'll probably purchase a higher quality shifter and use the XT derailleur, or buy her a new set of 8-speed wheels and use the XT shifter and derailleur.

The Tourney RDER is more than adequate to shift a 7 speed. (It'll shift 9 "adequately")
If it's aligned and in decent shape, your problem is elsewhere.
IF it's a box store bike, probably the front shifter is suspect, be it's "no name".
It might not even be indexed? Did you count the clicks?