Vande Velde, who finished second overall in the inaugural event last year, was 13 seconds behind Phinney on the 15.3-kilometre stage.
Last year's winner Levi Leipheimer, who was leading into the final day, faded badly during the time trial and finished ninth to slip to third overall.
"I can't believe I won," said Vande Velde. "The team worked so hard all week. I am over the moon (because) I've been the bridesmaid so many times in my career.
"I wasn't going to let one slip away this time."
The 36-year-old Vande Velde's last stage race win was the 2008 Tour of Missouri.
He had been involved in a tense battle with Teejay van Garderen for the overall lead for three of the seven days of the 1,338 kilometre race, before Leipheimer seized the lead on the final climbing day in stage six.
Last year's winner, however, finished 33 seconds behind Vande Velde in the time trial to slip to third overall.
Van Garderen of the United States was third in the time trial, 19 seconds behind Phinney and finished second overall with a 21-second deficit.
Phinney, who began the day in 71st overall, pedalled to his victory in an average speed of 52.64 kph.
"I had a tough early week with crashes and I almost pulled the plug," said Phinney, who was the 26th of 96 starters in the final stage.