The town of Three Hills was named after three big hills located north of the town. The entire community was moved to its present site on the Canadian Northern Railway (CNoR) in 1912 and officially became a village in the same year.
The first settlers were ranchers who had to bring their supplies from Didsbury, 48 miles (77.3 kilometres) east. Early ranchers were: Arthur Evans, Fred Brandly, and R.E. Morgan. The second waves of settlers to the area after the ranchers were mixed farmers. As homesteaders settled the region, Three Hills became a major service centre for the large wheat growing area.
In 1922, the Prairie Bible Institute was established on land north of the village limits. In time, the institute grew to a campus of 120 acres (48.6 hectares) in size with an enrolment of over 1,000 students. In 1983 the town annexed a large area surrounding the townsite, including the small hamlet of Grantville. This increased the population of Three Hills to more than 2,000 people. In 1984, the town expanded yet again to include the Prairie Bible Institute and Ruarkville which increased the population to 3,375.