The world No1 bounced back from 5-1 down in the second set to claim a 6-3 7-6 (2) victory over the American in Melbourne on Saturday, for her third Grand Slam title.
She ends the long reign of 1978 champion Chris O'Neil as the last home winner of the women's or men's singles and, by maintaining her perfect record in slam finals, becomes the only active player other than Serena Williams to have won major titles on three different surfaces.
Having shrugged off the pressure to breeze through to the final, Barty had to use all her competitive instincts to overcome 30th-ranked Collins, who brought the best out of her opponent in a terrific second set.
Barty now just needs the US Open to complete a career Grand Slam having won the French Open in 2019 and Wimbledon last summer, and it seems clear that women's tennis has found its consistent champion.
Organisers were permitted to increase ticket sales to 80 per cent of capacity and it was a terrific roar that greeted the arrival of Barty on court.
This was a huge occasion for Australian sport and among the crowd were two people who could put themselves in Barty's shoes - Sydney Olympic heroes Cathy Freeman and Ian Thorpe - as well as Hollywood star Russell Crowe.
Barty understandably looked nervous while Collins settled reasonably well and immediately sought to pounce on Barty's second serve.
At 2-2, the home favourite found herself staring at a break point but whipped a forehand winner to save it and from there Barty, and the tense crowd, relaxed into the occasion.
A wild double fault from Collins on break point in the next game gave Barty the advantage, and the top seed was untroubled through the rest of the first set.
The 25-year-old's serve is the foundation of her game, and she had been broken just once in six matches, but that became twice in the second game of the second set as Barty again paid for not landing more first serves.
Collins chose that moment to unleash one of her trademark “come on” yells towards her team, and there was another when she saved two break points in the next game.
The 28-year-old was into top gear now and producing the first-strike tennis that carried her to a swift semi-final victory over Iga Swiatek, who said afterwards that Collins' ball was the fastest she had faced.
That was very likely a factor in the two double faults that saw Barty broken again to trail 5-1, although she retrieved one of the breaks in the next game to lift the anxious crowd.
Collins was two points away from the set at 5-3 30-0 but back came Barty, with the American earning boos for asking the umpire to appeal for quiet during points.
Heading into the tie-break, Barty knew this was the moment to strike and she surged into a 6-2 lead before passing Collins and letting out a huge roar of delight and relief.
Additional reporting by PA Media.