Terkel was born in New York City, but at the age of ten, he moved with his family to Chicago, Illinois, where he spent most of his life. His father, Samuel, was a tailor and his mother, Anna (Finkel) was a seamstress. He had three brothers. From 1926 to 1936 they ran a rooming house that was a collecting point for people of all types. Terkel credits his knowledge of the world to the tenants who gathered in the lobby of the hotel and the people who congregated in nearby Bughouse Square. In 1939 he married Ida Goldberg and had one son.

He attended the University of Chicago, and received a law degree in 1934, but chose not to pursue a career in law. Instead, he joined the Works Progress Administration's Federal Writers' Project, working in radio, doing work ranging from voicing soap opera productions and announcing news and sports, to presenting shows of recorded music and writing radio scripts and advertisements.

Terkel published his first book Giants of Jazz in 1956. He followed it with a number of other books, most focusing on the history of the United States, relying substantially on oral history. He also serves as a Distinguished Scholar-in-Residence at the Chicago Historical Society.

Studs Terkel got his nickname because he reminded people of the fictional character Studs Lonigan, of James T. Farrell's trilogy. Terkel has never learned to drive and has long suffered from ommatophobia (fear of eyes).

Studs Terkel is perhaps best known for his 1970 book Hard Times: An Oral History of the Great Depression, in which he assembled recollections of the Great Depression from across a wide spectrum of society, from Okies to prison inmates, to the better off. Terkel won the 1985 Pulitzer Prize for his similarly formatted book The Good War, which challenged the prevailing notion that World War II was a time of unblemished national solidarity, goodwill, and unified purpose in contrast to the Vietnam War era. In 1997, he was elected a member of The American Academy of Arts and Letters.

In August 2005, Terkel underwent successful open-heart surgery. At 93 years old, he was one of the oldest people to undergo this form of surgery and doctors reported his recovery to be remarkable for someone of his advanced age.

On April 4, 2006, Terkel appeared on The Daily Show to a great response in order to promote his newest work, And They All Sang: Adventures of an Eclectic Disc Jockey.

On May 22, 2006, Terkel, along with other plaintiffs, filed a suit in federal district court against AT&T to stop them from giving customer phone records to the National Security Agency without a court order.

"Having been blacklisted from working in television during the McCarthy era, I know the harm of government using private corporations to intrude into the lives of innocent Americans," Terkel said in a statement. "When government uses the telephone companies to create massive databases of all our phone calls it has gone too far."