Normally you save your application settings in Isolated Storage, this is pretty secure, but really isn’t the best approach for storing stuff you need to protect. Although I guess anything is possible with enough time and computing horse power the Windows Phone 7.1 SDK provides a more secure mechanism to store things like passwords or application keys. It’s called ProtectedData and provides a mechanism to takes byte arrays and encrypt them and turn them back into their original state. This class is in the System.Security.Cryptography namespace.
This could be a simple way to use this to protect passwords in your application.
Just as a heads up if you try to use this in your XNA application, you’ll need to add the assembly mscorlib.extensions to your application.