Reed was born in West Los Angeles, California, the daughter of Cheryl Houston, a beautician, and Seth Reed, a set designer. She has an older brother, Nathan August Reed. Reed's father is Jewish and her mother is of Cherokee and Italian descent; Reed was raised without religion, though she has described herself as "Jewish" and grew up around Judaism (her brother had a Bar Mitzvah).

Reed has stated that her early home life was "complicated." Her parents divorced when she was two, and she grew up with her mother. She describes herself as having been "shy and a bookworm," but at the age of 12, while attending Palms Middle School, she became rebellious and emotionally volatile. The relationship between Reed and her mother became strained. At the age of 14, Reed was emancipated; she then moved out and began living on her own. She had no specific desire to become an actress.

After Thirteen's success, Reed returned to Alexander Hamilton High School, but dropped out again after a year. She cited her experiences involving "mothers who were sneaking into the school at lunchtime to confront and harass her about the film" as the reason for her departure. Reed was subsequently home-schooled, and she eventually received her high-school diploma. Reed divides her time between New York City and Los Angeles.

Reed and director Catherine Hardwicke finished the script for the semi-autobiographical film Thirteen in six days, a relatively short time for a Hollywood script to be written. Producers asked Reed to play a role in the film because they had trouble casting it, considering it an "uncomfortable" role for most young actresses. The film, starring Evan Rachel Wood, was released in 2003 to glowing reviews, giving Reed recognition in Hollywood as both an actress and a screenwriter. Following the film's release, Reed also appeared on The Ellen DeGeneres Show and hosted a number of award shows, including the Young Hollywood Awards (2003) and the Independent Spirit Awards Nomination Show, followed by the West Independent Spirits Awards, both in 2004.

Reed has continued to portray sexually promiscuous teenagers, including her character in Lords of Dogtown, also directed by Hardwicke. In early 2006, she appeared on the series The O.C., playing Sadie, a new love interest for the character Ryan Atwood. Reed noted she disagreed with the "trendy and shallow things" that The O.C. promoted, and that she appeared in the series only on the advice of her agents. Coincidentally, Reed appeared on The O.C. at the same time as later Twilight co-stars Cam Gigandet and Jackson Rathbone.

One of her most distinctive roles was in Mini's First Time, which received a limited release in the United States on July 14, 2006. In the film, Reed played a teenager who, through seduction, involves her stepfather in a plot to murder her mother. Reed has noted that her character does not "understand the weight of consequence," and that she enjoyed playing someone who she describes as "crass" and having a "trucker's mouth." Reed's character participates in explicit sex scenes, which had to be filmed from the point of view of Reed's back, as she was 16 at the time and thus legally unable to film her scenes in a more explicit manner.

Reed wrote another script set in New Zealand between the 1960s and the 1980s. Reed has noted that she feels she is a versatile actress, but feels typecast in roles of "sexy bad girls," noting that producers often tell her that she is too "sexy" for a particular part.

On February 12, 2008, it was announced that Reed would portray Rosalie Hale in the film adaption of Twilight, which was directed by Catherine Hardwicke. In June 2008, Reed wrote a letter to her fans, thanking them for supporting her through the controversy that surrounded her, a brunette, being cast as Rosalie (described as a blonde).

During a radio interview with Big O and Dukes of WJFK 1067, Jason Mewes stated that he is doing a movie called K-11 with Reed and Kristen Stewart, also of Twilight. The film, directed by Stewart's mother, takes place in a dorm of the Los Angeles County Jail, and was to feature both Stewart and Reed as male characters. However, Reed has recently released the information that she has now withdrawn from the K-11 project. In 2004, she received her first award, an Independant Spirit Award for 'Best Screenplay' for the movie 'Thirteen' which she shared with Catherine Hardwicke. In 2010, she also received an award for 'Superstar In The Making' at the Young Hollywood Awards.

In July 2010, Reed joined the lady assassin action-drama Catch .44 alongside Bruce Willis, Forest Whitaker and Malin Akerman.