Mr Watts, of Dannevirke Mitre 10, said: "She was lucky we got there just in time, as she was trying to put the fire out by herself and was disoriented.
"We both realised the smell of smoke was more than just a chimney fire."
The woman, who owns Retro Heaven in Gordon St, is a diabetic but Constable Paul Adrian, of the Dannevirke Police, said ambulance staff had assessed her as being okay.
"I was just lighting the fire when a bit of paper fell out and away it went," she said of the blaze.
Given a cuppa at the Dannevirke News office, she said she was fine and would spend the night in alternative accommodation.
Cameron had smelled smoke while driving on Burns Stand and ran for help to the Mitre 10 yard, where he saw Mr Watts.
It was also a "scary" experience for one young Burns St neighbour, Piritea McGuire.
"I could smell some sort of burning, but it wasn't until my dad and uncle got me outside that I noticed the place next door going up in flames," he said. "It was such a shock."
Mr Watts and Cameron are being applauded as heroes by police.
Mr Watts said: "At the time, common sense just takes over, but when we were confronted by the heat in that house ... "