Static home/defined posts page: Cannot make the custom pages work

Hello wordpress family,

I’m totally beginner of wordpress and basically forced into building a site in a week. But for the love of me, I cannot figure the custom pages out. Tried asking wordpress.stackexchange.com, but like always, there is no replies.

So what I’m trying to do is to use wordpress as CMS. So it has static home page, separate blogs page etc. So my first idea was to make a custom template called blogs.php with the /* Template Name: Blogs template */ on top. Then create two pages, Home and Blog.. On Blogs edit page set the custom template attribute to use the Blogs template. Then go to Reading settings and set the static page to Home and Posts page to Blogs. Seems logic to me.
But doesn’t work. As the Blogs page will still use the index.php template.

So I thought, that I will remove the Posts page (then the custom template works..) and just display posts there in a loop…however for some reason it doesn’t work. It displays the page name, in the loops title part and not the list itself.

Also I need to customize the blog entry reading page and since I cannot figure out the above, then obviously I cannot make this work either.. As I understand, wordpress detects filenames such as home.php index.php and page.php. So is there some automatic filename, that will work as blogs and blog-entry templates?

Also, how does the category and pagination filtering works?

Thanks in advance,
Harryson