To fictionalize is to take a true story and change the details so it's not literally accurate. When you write your first novel, you might simply fictionalize the family tales your grandparents have told you.
When you fictionalize something, you transform a factual story into fiction. A lot of writers use this technique to turn their own experiences and real people they know into interesting stories. If you're writing a story for school about the time your friend forged a note from his mom to excuse his absence, you might decide to fictionalize him so he doesn't get in trouble. Fictionalize comes from a Latin root, fingere, "to shape or form."