Peter Schmeichel was born in the Søborggård parish of Gladsaxe, Denmark, to Inger, a Danish nurse, and Antoni Schmeichel, a Polish jazz musician. He held Polish citizenship until 1970 when he, his father, and his three sisters became Danish citizens.

Schmeichel inherited his middle name – Bolesław – from his great-grandfather. He spent his early years in the town of Buddinge, Copenhagen, and began his football career playing for a team in the adjacent suburb of Høje-Gladsaxe. His first match came on 7 August 1972 at the age of 8. After a two-and-a-half-year unbeaten run, Schmeichel was approached by BK Hero, a team from a few divisions above Høje-Gladsaxe and with one of the largest youth football schemes in Denmark. BK Hero merged with Gladsaxe BK in 1979 to form Gladsaxe-Hero BK, and Schmeichel was presented with the opportunity to play for the Zealand FA's junior representative team.

Eventually graduating to the Gladsaxe-Hero senior squad, Schmeichel met his first mentor in Svend Aage Hansen, the first team coach at the club, and later to become his father-in-law. With Gladsaxe-Hero already relegated from the Danish Third Division with three games to go, Hansen promoted Schmeichel and six others from the youth team for a match against IF Skjold Birkerød. The team lost 1–0, but Schmeichel received mentions in local newspapers for his personal performance. At the end of the season, Hansen explained to Schmeichel his plan for the future, which involved Schmeichel spending two more seasons with Gladsaxe-Hero BK before moving on to Hvidovre, playing for the Danish national team, and eventually having a successful career abroad. Schmeichel admits that he had received an offer to play for B 1903's youth team, but he turned it down as the club "seemed a bit boring".

The following season Gladsaxe-Hero needed only to avoid defeat to Stubbekøbing to prevent relegation from the Danish National League. In the end, Schmeichel played one of the best games of his career and Gladsaxe-Hero won the match. At the end of the game, Hansen's daughter, Bente, ran onto the pitch and hugged Schmeichel. The two ended up going out as a couple, and they eventually got married.

Before becoming a professional footballer, Schmeichel had to work a number of jobs to make ends meet. His first job came in the dyeing department of a textile factory, but safety concerns led to his resignation. He then spent 12 months as a cleaner at an old people's home, before taking up an office job with the World Wildlife Fund. He originally worked in the organisation's shops, but three weeks after he joined, the store manager left and Schmeichel was promoted to the position of sales manager. Soon after, Schmeichel was called upon to do his four weeks of compulsory military service. However, this coincided with Hvidovre's summer training camp in Portugal, which he was permitted to go on with the proviso that he completed his military service the following month. Nevertheless, the delicate organisational situation that arose between the WWF, the Danish defence department and Hvidovre prompted Schmeichel to give up working for the WWF. A job with his father-in-law's flooring firm came next, until he realised that his knees could not support his 15 stone (95 kg) frame for eight hours a day, and he was offered a job with the advertising firm owned by Hvidovre's chairman, Niels Erik Madsen. This was to be his last job outside football, as he was offered a contract with Brøndby the following spring.

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Despite the fifth best defence in the league, conceding 40 goals in 30 games, Schmeichel and Hvidovre finished in 14th place and were relegated in 1985. After only a single season, the club bounced right back to the 1st Division, but Schmeichel was lost by Hvidovre to Danish runners-up Brøndby IF before the 1987 season. Winning the Danish league in his first year, he joined a club which he helped turn into a success. He made his debut for the Danish national team in May 1987, under national manager Sepp Piontek, and was selected for the Euro 88 tournament, where he eventually became Denmark's starting goalkeeper, after initially serving as a back-up to Troels Rasmussen in Denmark's opening 3–2 defeat to Spain; Denmark lost both of their remaining two matches 2–0 to West Germany and Italy, however, and were eliminated in the first round of the competition.

In all, Schmeichel and Brøndby won four championships in five seasons. The climax of his Brøndby career would come in the European 1991 UEFA Cup competition, which saw Schmeichel as an important part of the team that reached the semi-finals, keeping seven clean sheets in the competition. The club was eliminated from the tournament following a 2–1 away defeat to Roma with a last-minute goal by Rudi Völler. Following the tournament, Schmeichel was voted 10th in "The World's Best Goalkeeper 1991" poll by the IFFHS.

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Following his showings on the international scene, Manchester United signed Schmeichel on 6 August 1991 for £505,000, a price described in 2000 by Manchester United manager Alex Ferguson as the "bargain of the century." It was mainly because at the time, Schmeichel was a relative unknown outside of Denmark, especially within the United squad members. Schmeichel played the bulk of his career for United, eight years in total. With United, Schmeichel won five FA Premier League titles, three FA Cups, one League Cup, and the UEFA Champions League.

Manchester United finished as runners-up in Schmeichel's first season (also winning the Football League Cup for the first time in the club's history), but it was on the international stage that Schmeichel enjoyed his biggest success that year. In the Danish national team under new national manager Richard Møller Nielsen, Schmeichel was Denmark's starting goalkeeper at the Euro 92 tournament which they won. Although Denmark initially finished behind Yugoslavia in their qualification campaign for the final tournament, the latter nation were banned from the competition, while Denmark replaced them in the finals. Schmeichel made a string of important saves during the tournament, keeping a clean sheet in Denmark's opening 0–0 draw against England, and producing decisive stops against Eric Cantona and Jean-Pierre Papin in a 2–1 win over France to advance to the last four. In the semi-finals against defending champions the Netherlands, following a 2–2 draw after extra time, he stopped a penalty kick from Marco van Basten – the only miss of the shoot-out – which enabled Denmark to advance to the final on a 5–4 victory. Schmeichel also made several decisive saves in the final, and even held a cross with one hand, keeping a cleansheet in his nation's 2–0 victory over Germany. For his performances throughout the season, he was elected "The World's Best Goalkeeper of 1992" by IFFHS.

In the 1992–93 season, 22 clean sheets from Schmeichel helped United win the Premier League championship, the first time the club had won England's top trophy in 26 years. Schmeichel was once again named "The World's Best Goalkeeper" in 1993. In January 1994, Schmeichel fell out with Ferguson, as United had squandered a 3–0 lead to draw 3–3 with Liverpool. The two had a row where Schmeichel "said the most horrible things", and he was subsequently sacked by Ferguson. A few days later, Schmeichel made an improvised apology to the other players. Unknown to him, Ferguson was eavesdropping on this, and he let Schmeichel stay at Manchester United. Schmeichel and United repeated the Premier League championship win at the end of the season, also capturing the FA Cup. At international level, however, he suffered disappointment as Denmark failed to qualify for the 1994 FIFA World Cup.

Schmeichel played for Denmark at Euro 96, hosted by England. The defending European Champions went out in the preliminary group stage, despite delivering results equivalent to the Euro 92 tournament in the first round.

Following a match against Arsenal in November 1996, Schmeichel was accused of racism by Arsenal striker Ian Wright. During the game, Schmeichel and Wright had a number of controversies, and at the end of the game, the two players confronted each other on their way off the pitch. After the game, news emerged of a police inquiry into the incident, where it was alleged that Schmeichel had made a racist remark. After months of politicising by The FA and The PFA, who wanted a "converted" Schmeichel as their posterboy of the "Kick Racism out of Football" campaign, no evidence was found and the case was dropped.

Under new national manager Bo Johansson, Schmeichel was a part of the Danish squad at the 1998 FIFA World Cup. He was one of the leading members of the Danish campaign, which ended in a 3–2 quarter-final defeat to Brazil.

Schmeichel ended his Manchester United career on the highest note, when Schmeichel and United won the Treble, the FA Premier League title, FA Cup and UEFA Champions League, in the same season. In that year's FA Cup semi-final against Arsenal, Schmeichel saved a penalty kick by Dennis Bergkamp in the last minutes of the game (which Schmeichel revealed he was unaware of time), to send the game into extra time. In the absence of the suspended Roy Keane, he captained United in the UEFA Champions League final in May 1999. German opponents Bayern Munich had a 1–0 lead until the dying minutes of the game, when United received a corner kick. Schmeichel ran into the attack attempting to cause confusion, and Teddy Sheringham scored the equalising goal. A few seconds later, Ole Gunnar Solskjær scored the 2–1 winner for United to ensure that Schmeichel's United career ended on the highest possible note. In an unforgettable celebratory moment, Schmeichel was shown cartwheeling gleefully in his area after Solskjær's winning goal.

With his departure, Manchester United had trouble finding a replacement for him, going through several high-profile goalkeepers including Mark Bosnich, Massimo Taibi, Fabien Barthez, Tim Howard and Roy Carroll before finally buying Edwin van der Sar, who Sir Alex Ferguson considered the best goalkeeper to have played for the club since Schmeichel.

Schmeichel played his 129th and last international against Slovenia in 2001. He kept a clean sheet in the match – something he had done, staggeringly, in 42 per cent of his appearances for Manchester United. Schmeichel will be remembered as far more than being the greatest goalie in the history of De Rød-Hvide and the Red Devils. Indeed, in a 2001 Reuters poll, he beat Lev Yashin and Gordon Banks to be named the finest keeper in football history. Despite being a goalkeeper, he would run into the attack on corner kicks if his team was behind. The sight of him going up for the corner was a great distraction to opposing defenders. He scored a goal in this fashion, for Man United, in a UEFA Cup match against Rotor Volgograd at Old Trafford in September 1995. He scored in the last minutes of the game to tie the match 2–2, though United were eliminated from the tournament on the away goals rule