Cates was born Phoebe Belle Katz in New York City; her father is director Joseph Cates and her uncle is Gilbert Cates, also a director. Her father is of Jewish heritage; her maternal grandfather was a Chinese Filipino and her maternal grandmother was a Russian Jew. Cates attended the Professional Children's School. She followed in the steps of her father and uncle in changing her surname for professional reasons.

She achieved icon status in the early 1980s for her role in the teen comedy Fast Times at Ridgemont High, in which she stripped off her bikini top in a slow-motion fantasy sequence. Harper's Bazaar magazine, in 1984, included her in their list of America's 10 Most Beautiful Women.

That same year, in the romance film Paradise, and in contrast to the coyness of Brooke Shields in the similarly themed and more popular The Blue Lagoon, Cates appeared nude, although she was said to have used a body double in some of the close-ups. In a People magazine article, Cates said she had expressed reservations about this situation to her father, who advised her to play it in whatever way she felt was artistically honest.

Her later roles were more modest and largely oriented toward younger audiences, who remember her best as the female lead in the two Gremlins films. Her face made the covers of teen magazines such as Seventeen, Tiger Beat, Teen Beat and others.

In 1989, she married actor Kevin Kline, whom she had originally met while auditioning for the part that Meg Tilly ultimately won in The Big Chill. In 1991, she was slated to be in Father of the Bride, but dropped out due to pregnancy. In 1996, she narrated the award-winning documentary short, The Flame, a film about the nonprofit world hunger organization Heifer International.

Kline and Cates make their home in New York City and have two children, Owen, born in 1991 (who recently received rave reviews for his performance in The Squid and the Whale) and Greta, born in 1994. They all appeared in Cates' most recent film, The Anniversary Party (2001). The film was an ensemble comedy written and directed by Scottish actor Alan Cumming and Cates' real-life best friend of the past 25 years, Fast Times at Ridgemont High co-star Jennifer Jason Leigh, and in it Cates played, fittingly enough, a Hollywood actress who has retired from acting to be a full-time mother.

In 2005, Cates opened her own gift store/boutique emporium called Blue Tree on New York's Madison Avenue.