Peter was born in New York City. His father, Alwin Michaelsen, is a financial consultant and his mother, Gail, was once Alwin's secretary. Gail is the niece of Stork Club owner Sherman Billingsley, and cousin of Glenn Billingsley who was married to Actress Barbara Billingsley (1915–2010). Gail was the one who initially took the children around to auditions. She once took the children to Browns Mills, New Jersey for a commercial commemorating US troops. All five of the children in the family had acting careers when they were young. The oldest of Billingsley's siblings, Dina and Win, had the briefest acting careers working mostly in commercials with brief guest spots on television shows. Peter's elder sister, Melissa, may be best known for her role as Maxx Davis on Me and Maxx. Peter's older brother, Neil, began playing Danny Walton on the daytime soap opera Search for Tomorrow in 1975 and has had numerous roles in commercials and guest shots on TV series. Following his acting career, Neil works in Finance in New York City.

Billingsley's first acting role was as a two-year-old in a Geritol commercial with Betty Buckley playing his mom. He went on to star in about 120 television ads throughout the 1970s and early 1980s. At 12 he was quoted as saying: "After 100 (commercials), you lose count." He was likely best known for a series of commercials for Hershey's chocolate syrup in which he portrayed the popular character Messy Marvin. One of Billingsley's earliest film roles was in 1978's If Ever I See You Again, written and directed by Joseph Brooks.

As the late 1980s approached, Billingsley's acting career slowed. He made guest appearances on Who's The Boss?, Punky Brewster, The Wonder Years, and Highway To Heaven, and appeared in The Dirt Bike Kid (for which he won a Young Artist Award), and Carly's Web, Russkies, and Beverly Hills Brats.

His role in 1981's Paternity opposite Burt Reynolds earned a nomination for "Best Young Comedian – Motion Picture or Television" at The Young Artist Awards. In 1981, he appeared in Honky Tonk Freeway, and that October was a guest on The Tonight Show Starring Johnny Carson. In 1982 Billingsley starred in several features, including Death Valley, Massarati and the Brain, and the made-for-TV movie Memories Never Die with Lindsay Wagner and his sister, Melissa Michaelsen. He had a featured guest role as Gideon Hale on Little House on the Prairie, began a three-year stint as a co-host on NBC's popular Real People (for which he earned another Young Artist Award nomination), and he hosted a two-episode offshoot of the show called Real Kids.

In 1983 Billingsley starred in A Christmas Story, based on Jean Shepherd's In God We Trust, All Others Pay Cash, which built its audience slowly over the years and is now broadcast for twenty-four hours from Christmas Eve until Christmas Day on TBS. The film earned Billingsley another Young Artist Award nomination, and is arguably the one role he is most associated with. He has been quoted as saying that people still approach him on the street, only to say "you'll shoot your eye out, kid!"

In 1984 Billingsley starred in an adaptation of The Hoboken Chicken Emergency with Dick Van Patten and Gabe Kaplan, a special Thanksgiving episode of the PBS series WonderWorks. He appeared on a "Super Teen" special edition of Family Feud, and on Celebrity Hot Potato.

On January 28th, 1986, Billingsley was present at launch pad 39B (at NASA's Kennedy Space Center in Florida) for the doomed launch of the Space Shuttle Challenger. He and classmates of the son of America's first teacher-astronaut (Christa McAuliffe) cheered as the space shuttle Challenger lifted skyward. Their delight turned to horror as the shuttle exploded 73 seconds into FLIGHT. Billingsley was a spokesman for the young Astronaut program.

The early 1990s saw Billingsley tackling older roles such as a would-be jock who gets hooked on steroids in the CBS Schoolbreak Special The Fourth Man. On that project he formed a close friendship with Vince Vaughn. His next Schoolbreak Special appearance was in The Writing on the Wall (1994), starring Hal Linden as a rabbi who teaches three boys about the horrors of intolerance after they are caught defacing his home, temple, and car with swastikas and anti-Semitic graffiti. Billingsley was nominated for an Emmy Award for this role.

The most rewarding of his later film acting assignments was Arcade (1993), in which he starred as a teenaged "virtual reality" addict; he worked as the post-production supervisor (credited as Peter Michaelsen). He made some career decisions and began working behind the scenes more. Known as Peter Michaelsen, he was assistant Editor on Knights, a film which featured Kris Kristofferson. In 1994 Peter starred in, wrote, and directed (credited as Peter Billingsley) the short film The Sacred Fire, and credited as Peter Michaelsen in the executive Producer function. This film won an Academy of Science Fiction, Fantasy and Horror Films' Golden Scroll Award.

Billingsley released a CD titled Christmas Stories...Christmas Songs on Run For Cover Records in 1999 with longtime friend Brian Evans. He signed on as Executive Producer of a musical adaptation of A Christmas Story that opened in Seattle in December 2010. He is "...honored to be a part of this project and look forward to bringing the play to more stages... Just think about the idea of a leg-lamp kickline."

Billingsley's acting career continues as well, with small roles in Sherman Oaks, Family Reunion: A Relative Nightmare, Elf, L.A. Heat, and No Deposit, No Return, which was voted Best Feature Film at the New York International Independent Film and Video Festival in 2000. He took an acting part in an experimental film for the new Maxivision 48 projection system developed by Dean Goodhill.

His career behind the scenes continued, including work on The Discovery Channel's A.R.K., The Adventures of Animal Rescue Kids, Patriot Son, The X Show, Made, and Elf, in which he has a cameo appearance. In 2001 he was nominated for an Emmy Award as co-executive Producer for the show Dinner for Five. In 2005 he helped produce the movie Zathura. He was an executive Producer for the Universal Pictures production The Break-Up in which he had a small acting role (as Andrew), appearing alongside frequent collaborator Jon Favreau. Billingsley served as executive Producer on Director Favreau's Iron Man feature film; he also acted in the film, playing a scientist who works for Obadiah Stane. Billingsley, Favreau and Vaughn appeared in Four Christmases (2008). Couples Retreat (2009) starring Favreau and Vaughn was Billingsley's first major film as Director and this was followed by his second directorial effort Term Life, which also starred Vaughn.