Abnormalities of the peripheral myelin protein 22 (PMP22) gene, including duplication, deletion and point mutations are a major culprit in Type 1 Charcot–Marie–Tooth (CMT) diseases. The complete absence of PMP22 alters cholesterol metabolism in Schwann cells, which likely contributes to myelination deficits. Here, we examined the subcellular trafficking of cholesterol in distinct models of PMP22‐linked neuropathies. In Schwann cells from homozygous Trembler J (TrJ) mice carrying a Leu16Pro mutation, cholesterol was retained with TrJ‐PMP22 in the Golgi, alongside a corresponding reduction in its plasma membrane level. PMP22 overexpression, which models CMT1A caused by gene duplication, triggered cholesterol sequestration to lysosomes, and reduced ATP‐binding cassette transporter‐dependent cholesterol efflux. Conversely, lysosomal targeting of cholesterol by U18666A treatment increased wild type (WT)‐PMP22 levels in lysosomes. Mutagenesis of a cholesterol recognition motif, or CRAC domain, in human PMP22 lead to increased levels of PMP22 in the ER and Golgi compartments, along with higher cytosolic, and lower membrane‐associated cholesterol. Importantly, cholesterol trafficking defects observed in PMP22‐deficient Schwann cells were rescued by WT but not CRAC‐mutant‐PMP22. We also observed that myelination deficits in dorsal root ganglia explants from heterozygous PMP22‐deficient mice were improved by cholesterol supplementation. Collectively, these findings indicate that PMP22 is critical in cholesterol metabolism, and this mechanism is likely a contributing factor in PMP22‐linked hereditary neuropathies. Our results provide a basis for understanding how altered expression of PMP22 impacts cholesterol metabolism.