With the advent of Generative AI Tools in higher education, novel strategies for content generation and learning experiences are being explored, even as AI-created content's ethical use and credibility are interrogated. This study investigates the crucial relationship between Generative AI Tools and critical digital literacy, highlighting the need to actively nurture these skills among learners and educators. While the role of artificial intelligence in education has been probed in the past, the dynamics between Generative AI Tools and critical digital literacy have been less attended to. Our work attempts to fill this research gap and advance the conversation on mindful AI integration. We examine the interplay of critical digital literacy and AI tools, prioritising analysing AI-created content, ethical implications, and the potential for creative empowerment. Leveraging qualitative research methodologies, we analyse the impact of these concepts on active teaching and learning methods in higher education. Our research emphasises that enhancing critical digital literacy skills is vital for determining the trustworthiness of AI-created content and for grappling with the ethical questions raised by using Generative AI Tools. Our study further illustrates how these tools can enrich creative pedagogical practices in higher education settings when used judiciously. Our work is instrumental in advising higher education stakeholders – educators, academics, and researchers – on effective strategies for incorporating Generative AI Tools and promoting critical digital literacy. This proactive approach encourages the responsible and ethical utilisation of AI technologies in higher education, aligning with active learning principles.