Red Bay is named for the reddish cliffs found along the local shoreline. Between 1550 and 1600, Red Bay was the site of Buttes, a major Basque whaling station. A whaling ship, the San Juan, lost in 1567 in Red Bay Harbour, is the oldest shipwreck north of the Caribbean and one of the best preserved. After 1600, the whaling station was abandoned mainly due to the reduction of the whale stocks.
In the 18th century, Red Bay was a Canadian fur trading post. Red Bay became a Newfoundland fishing station in the 1800s. The first census was in 1856, and it showed 72 people settled in Red Bay; it increased to 152 by 1891. Dr. Wilfred Grenfell helped to establish the first co-operative at Red Bay in 1896.
In the 1950s and 1960s, many families moved to Red Bay from outlying fishing stations, and in the 1960s the first road was constructed. By the 1970s, archaeological work began and this led to Red Bay becoming an historical site and making tourism an important industry for the town. Red Bay was incorporated as a town in 1973.