Each family and each cruise is different. First, about upgrading. The only difference between at Cat. 5 and a 6 is location on the ship--not worth the $ in my opinion. A cat 4 is slightly larger than the "standard" stateroom because it is designed to handle a 5th person in a fold down bed. You haven't said how many of you are cruising, but only you can decide whether a few extra square feet are worth the $. Personally, we spend little time in our cabin. Unless I'm moving up to Cat 3 (which does have additional services, space, etc.), I'd stick to paying for the 6. 4 vs. 6 is really not a big deal at all, and I can use the money elsewhere. Of course, I wouldn't turn down a free upgrade unless I had a specific cabin that I really liked.
As above, you will use only the KTTW card on the ship, which will be billed to your credit card. It is billed at increments as your charges increase--usually when your onboard expenses hit $400-$800 it is billed to the credit card. You can attach the whole cabin to one credit card or each person sailing can be attached to a different card. CHildren and have charge privleges or not (your choice). What you cannot do is to limit their charging to a certain amount. Of course, you can talk to them, threaten them, etc.....but
DCL is not involved in this and you are responsible for any charges they make. You can use cash for tips or charge them. The only places you need cash are the laundry room and a small amount to tip room service.
Kids really don't need charging. If you want them to have an arcade card, you can purchase it (any denomination, multiples of $10), and refill it if you'd like. They can get sodas, milk, juice, etc. on deck 9 any time. They don't need to drink smoothies.
Where you can drop major $.....the spa, alcohol, Shutters (photo shop), the gift shops, bingo, excursions. DO you have to? No. You can take your own photos. The character handlers will even take family photos for you with your camera. You can do excursions on your own, generally cheaper than thru DCL. You can bring some alcohol on board to have in your cabin or take a glass with you to dinner. You can do the unlimited rain forest/fitness center and skip the spa treatments. The gift ship can be "off limits."
Of course, the islands (except Castaway) take cash, credit cards, trav. cheques, etc.
On 7 day cruises, we have spent as little as $400 or as much as several thousand. The difference? On one cruise, I bought some jewelry for myself and my daughter. On another, some major spa time. It depends on your budget and your mood.
On the last cruise, I allowed DD to have charging, but gave her a $ amount that she could not exceed. She asked that if she didn't spend all her money, could she have it when we got home...which I agreed to. It was very interesting to find that SHE thought she didn't need smoothies when they were costing $4 of HER money. She was very responsible, and spent about half of what I allowed.
My DS figured out he could od this but we were lucky he only bougth one extra card. 
