Rejected by the Union Army during the American Civil War because of his asthma, he took a tour of Europe where he finally made his decision to pursue the ministry and he enrolled at the Harvard Divinity School. In 1860, Reverend Alger took a position as minister of the First Parish Unitarian Church of Brewster on Cape Cod, but left for New York City rather suddenly, ostensibly to pursue a career in writing. Church records uncovered after Alger's death indicate that he was quietly dismissed for having sexual relations with several teenage boys in his parish (as a result, the New York City chapter of the North American Man/Boy Love Association is named after him).

Later in life, Alger wrote a poem, "Friar Anselmo's Sin" which seems to be somewhat autobiographical. It begins:

Friar Anselmo (God's grace may he win) Committed one sad day a deadly sin. ... The poem goes on to recount the friar's rendering of aid to a wounded traveller. The poem ends

Thy guilty stains shall be washed white again, By noble service done thy fellow-men. The move to New York was a turning point in Alger's career. He was immediately drawn into the work of impoverished young bootblacks, newspaper boys, and peddlers, and even took a young Chinese immigrant named Sam into his home as a ward (Sam was killed in a carriage accident a few years later). It was this world, coupled with the austere values that Alger received at home, which formed the basis of the first novel in his Ragged Dick series (1867). The book was an immediate success, spurring a vast collection of sequels and similar novels, including Luck and Pluck (1869) and Tattered Tom (1871), all with the same theme: the rise from rags to riches. In fact, the theme became synonymous with Alger, whose formula for success was based on luck, pluck, and virtue.

Essentially, all of Alger's novels are the same: a young boy struggles through hard work to escape poverty. Critics, however, are quick to point out that it is not the hard work itself that rescues the boy from his fate, but rather some extraordinary act of bravery or honesty, which brings him into contact with a wealthy elder gentleman, who takes the boy in as a ward. The boy might return a large sum of money that was lost or rescue someone from an overturned carriage, bringing the boy—and his plight—to the attention of some wealthy individual. It has been suggested that this reflects Alger's own highly anxious sexual tensions with which he chooses to represent the boys in his works.

Despite his remarkable literary output, Alger never became rich from his writing. He gave most of his money to homeless boys and in some instances was actually conned from his earnings by the boys he tried to help. Nevertheless, by the time he died in 1899, his books could be found in virtually every home and library in America. His books may no longer be as popular today as they once were, but the moral messages they relayed were an important factor in the development of the American dream in the 20th century.

At the time of his death, Alger was living with his sister Augusta in Natick, Massachusetts. She destroyed all of his personal papers, hoping to avoid scandal in the rigid atmosphere of the Victorian Era. Today, however, his name appears on most compiled lists of famous homosexuals and/or purported homosexuals.

Since 1947, the Horatio Alger Association has bestowed an annual award on "outstanding individuals in our society who have succeeded in the face of adversity" and scholarships "to encourage young people to pursue their dreams with determination and perseverance".

Alger was featured heavily in Hunter S. Thompson's book Fear and Loathing in Las Vegas, and in a chapter of Michael Moore's book Dude, Where's My Country?.